Paper 6 - IBS

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Be stronger than your excuses!

CA Vinay Kumar
 INDEX

Sl No. Case Study Digest Page No. Remarks, if any

1 Case Study No. 01 2-8
2 Case Study No. 02 8-13
3 Case Study No. 04 13-18
4 Case Study No. 07 19-25
5 Case Study No. 11 25-29
6 Case Study No. 12 30-34
7 Case Study No. 16 34-40
8 Case Study No. 17 41-47
9 Case Study No. 18 47-51
10 Case Study No. 21 52-56
11 Case Study No. 22 57-61
12 Case Study No. 28 62-65
13 Case Study No. 36 66-70
14 Case Study No. 37 70-77
15 Case Study No. 41 77-82
16 Case Study No. 42 82-86
17 Case Study No. 43 86-91
18 Case Study No. 44 91-96
19 Case Study No. 45 96-100
20 Case Study No. 46 100-106
21 Case Study No. 48 106-110

Subject % in 21 Case Studies

SCMPE 40%
FR 17%
AFM 11%
Law 9%
IDT 8%
DT 8%
Audit 7%
Total 100%

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 CASE STUDY 1
Caber Cabs, which is better known by the name Caber, is an Indian startup company (privately held) which provides online cab
services to the greater population of the country. It was founded in the year 2008 by Ikshit Bothra (current CTO) and Saurabh
Jain (current CEO). Caber initiated its operations and services from Chennai and now the headquarters of this startup company
is based in Pune. Within a span of few years, Caber Cabs have expanded its base to as many as 85 cities across the country
with around 2 lakh cars operational in its online cab services. In 2012, the startup company also went forward to provide auto-
rickshaw services to the middle- class clan of the Indian families through its mobile app in few selected cities like Mumbai,
Hyderabad, Jaipur and so more.
In FY 2022, Caber’s market share accounted for approximately 55%, and it reached a valuation of 6.5 billion US dollars in 2023.
Caber’s business model disrupted the traditional taxi industry by offering a more convenient and efficient way to hail rides. The
company utilized a technology- driven approach, using algorithms to match riders with nearby drivers and optimize routes, dynamic
pricing model, known as "surge pricing," adjusted fares based on demand, allowing the company to maximize revenue during peak
hours. It faced regulatory challenges and opposition from taxi unions in many cities, leading to legal battles and protests.
Major customer segments of Caber are individuals who do not own a car or can’t drive on their own. A segment of people who
need an affordable ride – they share cab services by pooling a group of people from a common area. Various customers who
need a premium ride or a quick ride also book rides with Caber. Overall, it serves the people who are looking for convenient cab
bookings. Caber Cabs is amongst the fastest growing online cab service providers in India and aims to dominate the Indian
market with its innovative and customer-oriented business strategy which includes - Mobile App awareness to the common people
through the launch of a customized mobile-specific technique named as “App Analytics” with the help of which the app can
track and measure the overall performance of the services in particular city or through the drivers. Providing Ad campaigns on
various social media platforms. Targeting the right audience which as per a recent study has confirmed that the average customers
were of 20-25 years of age who were working in the corporate companies and needed cab services to pick them up and
drop them at their office premises
Caber works as a digital aggregator app platform, connecting passengers who need a ride from point A to point B with
drivers that are willing to serve them. “Passengers” generate the demand, “Drivers” supply the demand and “Caber” acts
as the marketplace/facilitator to make this all happen seamlessly on a mobile platform. Caber has been able to generate strong
value propositions for both passengers and drivers to get onboard onits platform and create disruption in the taxi/ cab
industry.
Certain facilities provided by Caber to its passenger customers are convenient cab bookings. Real-time tracking, the ride
hailing service refers to the ability of passengers to track the location of their assigned vehicle in real time using the mobile app.
This feature provides passengers with an estimated time of arrival and allows them to see the route the driver is taking to reach
their location. It promotes cashless rides by giving the option for passengers to pay fortheir rights using digital payment methods
such as debit cards, mobile wallets or Caber Money (Caber’s digital wallet). This eliminates the need for passengers to pay in
cash at the end of their ride, offering a convenient and secure payment experience. Further, the passengers using the Caber
app experience shorter waiting times. This could be due to factors such as the availability of nearby drivers, efficient routing and
effective matching logarithms that quickly connect passengers with available drivers. Lower wait times contribute to a better
overall experience for passengers, reducing the time they spend waiting for their ride to arrive. Its app provides an upfront pricing
feature, it shows the estimated fare for the trip before confirming the booking. This estimated fare is calculated based on factors
such as distance, time, and any surge pricing that may be applicable at the time of booking. By providing upfront pricing, Caber
aims to offer transparency to passengers regarding the cost of their ride, helping them make informed decisions before booking
a ride. In the Caber app, "multiple ride options" typically refers to the various categories or types of rides available for users to
choose from when booking a ride. These options may include Caber micro offers small and affordable cars for short trips or
solo travelers. These multiple ride options cater to the diverse needs and preferences of Caber users, providing flexibility in
terms of vehicle type, comfort level, and pricing. Users can select the option that best suits their requirements for each
specific journey.

The hiring department at Caber undertakes an extensive search to hire experienced drivers, who can be further trained to
professionally handle high-end luxury segment customers. For this, the company plans to approach a staffing agency that will
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provide candidates based on Caber’s specific requirements for an experienced driver. They will also do the background check for
these drivers to ensure their fitness and safety record. Caber plans to have regular maintenance done on the cars to
ensure that they are in working condition. They also have approached insurance companies for car and accident insurance.
After hiring its Drivers, they provide flexibility to drive on their own terms like setting their own schedule based on their preferences
– day shift, night shift, full time or part time. Drivers can also decide where they want to opera1 within the service area. They
may prefer to work in specific neighborhoods, cities, or regions based on factors such as demand, traffic conditions, or
familiarity with the area. Caber training sessions for drivers are comprehensive and focused on enhancing professionalism,
safety, and customer satisfaction. Covering a range of topics including safety protocols, customer service skills, navigation
techniques, vehicle maintenance, company policies, technology usage, and financial management, these sessions aim to equip
drivers with the necessary knowledge and skills to excel in their role. By providing education and guidance in these key areas,
Caber ensures that its drivers can deliver a reliable, safe, and enjoyable experience for passengers while also empowering them to
manage their work effectively as independent contractors in the ride-hailing industry.
Caber supports its drivers by facilitating access to vehicle loans, enabling them to become vehicle owners and enhance their
earning potential. Through partnerships with financial institutions, Caber offers specialized loan programs with competitive interest
rates and flexible repayment terms tailored to the needs of ride-hailing drivers. Additionally, Caber runs a vehicle leasing program in
many cities to help new drivers get onboard faster. Drivers pay an upfront security deposit for the vehicle, and payments are
automatically deducted on a weekly basis from their earnings. Caber purchases motor vehicles or motor cars from Shakti
Motors and leases out to its drivers. The lease agreement states that in case of default by drivers for payment of lease rent or
other terms and conditions, Caber has power to repossess the motor cars/vehicles leased out. The registration of vehicles is in
the name of lessee as per the provisions of Motor Vehicles Act, 1988. Caber has claimed a depreciation of ₹ 5.00 crores during the
previous year 2023-24 on the motor cars leased out

Caber makes money by taking a cut on each ride (shared or individual) from the drivers. Caber provides the drivers on its platform
with a robust supply of ride requests to accept, fulfill, and make income. While making a booking, the passenger pays Caber for the
ride through the app. Caber then transfers the payment to the driver’s account after taking some amount of trip commission for
doing the job of a broker. The commission rates may vary from 15-30 % depending on the market.
Dynamic pricing/ surge pricing is charged whenever there is a higher demand for cabs than what can be served at that
moment (for example, at the airport after a flight lands), the fare goes up based on a surge price calculation algorithm. If a
passenger cancels a ride after a certain time frame, say five minutes, he/she is charged a cancellation fee.
Caber App is a very popular app with millions of active users. This makes it a good option for brands to do promotions. Its current
app interface pushes a feed style layout for intuitive content consumption. Over the period, it may go on to become a strong revenue
source by becoming a channel for sponsored content.
The company offer discounts and promotions to end-users (that are not our customers) to encourage use of the platform. These
are offered in various forms of discounts and promotions and include:
 Targeted end-user discounts and promotions: These discounts and promotions are offered to a limited number of end-
users in a market to acquire, re-engage, or generally increase end-users use of the Platform, and are akin to a coupon.
 End-user referrals: These referrals are earned when an existing end-user (the referring end-user) refers to a new end-user
(the referred end-user) to the platform and the new end-user who is not our customer takes their first ride on the platform.
These referrals are typically paid in the form of a credit given to the referring end-user. These referrals are offered to attract
new end-users to the Platform. The company records the liability for these referrals and corresponding expenses as
sales and marketing expenses at the time the referral is earned by the referring end-user.
 Market-wide promotions: These promotions are pricing actions in the form of discounts that reduce the end-user fare
charged by Drivers to end-users. This also includes any discounts offered under our subscription offerings and certain
discounts within the Caber Rewards programs, which enable End-users to receive a fixed fare or a discount on all eligible
rides. Accordingly, Caber records the cost of these promotions as a reduction of revenue at the time the transaction is
completed.
 Refunds and credits to end-users due to end-user dissatisfaction with the Platform are recorded as marketing expenses
or as a reduction of revenue.
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 Caber offers 24x7 customer support to ensure that passengers and drivers receive assistance at any time, enhancing the
overall user experience. Caber's value proposition revolves around providing convenient, safe, and reliable transportation
solutions for passengers while offering flexible earning opportunities and support for its driver-partners.

Recently Caber is planning to introduced customized luxury rides to attract high end customers in all metropolitan cities in India
best known for their fast-paced lifestyle. Due to expansion of business in various segments requiring restructuring in leadership
team for effective management the board has decided to increase the number of directors. Caber wishes to diversify its current
business in various segments to enhance its portfolio. As per the Board, new hands are required for decision-making for which
qualified and experienced personnel are required to be appointed as directors. Currently, the company already has 7 directors.
Now with the revised strategy, the Board of Directors desires to increase the number of directors from 7to 16.
In FY 2022, Caber’s market share accounted for approximately 55%. It has reached a valuation of 6.5 billion US dollars in the
year 2023.

Sample Fare Break-up: X books an auto for travelling from Jhotwara, Jaipur to Sanganer, Jaipur. Y an auto driver, a resident of
Rajasthan accepted the ride. On completion of trip the operator received fare from X, a probable break-up of it can be as under:

Driver Fees – ₹ 800 Booking and convenience Charge – ₹ 200

I. Multiple Choice Questions

1. Which of the following statements accurately describe characteristics of disruptive innovations of Caber?
i. Caber initially targeted niche markets to establish its presence
ii. Caber offered competitive performance and quality compared to existing products or services
iii. Caber immediately dominated the market upon introduction
iv. Established companies did not align with the preferences of their current customers and overlooked Caber's
disruptive innovations
v. Caber's innovations tend to evolve and improve over time, eventually surpassing existing products or services
(a) a, b, and d only (b) a, c, and e only (c) b, d, and e only (d) a, c, and d only
2. With reference to fare break-up, what should be the total amount of fare and GST assuming the rate of GST as 5%, if X
hailing the ride is not claiming ITC on above and also who is the person liable to pay GST in the given case?
(a) Rs 1,050, CGST Rs 25, SGST Rs 25; Caber cabs (b) Rs 1,010, CGST Rs 5, SGST Rs 5; X
(c) Rs 1,120, CGST Rs 60, SGST Rs 60; Y (d) Rs 1,096, CGST Rs 48, SGST Rs 48; X
3. Caber charging a premium for instant booking of prime cars had provided a new value to customers by making service access
easier and more convenient than its basic version. Adaptability to which model created a significant advantage for the
organization.
(a) Experience Model (b) Subscription Model (c) On Demand Model (d) Free Model
4. Analysing the facts from the above, determine which classification best describes Caber's current growth stage?
(a) Startup (b) Scale-up (c) Unicorn (d) Incumbent
5. Which statement is correct regarding the increase in the number of directors in accordance with the
provisions of the Companies Act, 2013?
(a) The increase in the number of directors can be implemented by passing a general resolution in the general
meeting.
(b) The company should pass a special resolution in the general meeting to increase the maximum number of
directors to 16.
(c) The company cannot increase the number of directors beyond 10.
(d) The company cannot increase the number of directors beyond 15.
6. Based on the scenario, how did Caber address customer pains and generate gains, and what specific strategies and features
did it implement to enhance the overall customer experience and contribute to social and environmental benefits?
DISCUSS.
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7. DRAW a business model canvas for Caber.
8. With reference to Case, the depreciation claim is rejected by the Assessing Officer onthe ground that the Caber had
only financed for purchase of leased vehicles and hence it is neither owner nor used the same motor cars in his business.
Comment on the contention of the Assessing Officer.

ANSWERS TO THE CASE STUDY 1

1. (i) a, b, and d only

Reason:
a. Caber initially targeted niche markets to establish its presence: This statement accurately reflects Caber's
strategy of targeting specific cities or areas where traditional taxi services were inadequate. By focusing on niche
markets initially, Caber established its presence and gradually expanded its operations.
b. Caber offered competitive performance and quality compared to existing products or services: Caber aimed
to provide a competitive alternative to traditional taxi services by offering features such as surge pricing, real-
time tracking, and cashless payments. This allowed Caber to meet or exceed the performance and quality
expectations of customers.
d. Established companies did not align with the preferences of their current customers and overlooked Caber's
disruptive innovations: Traditional taxi companies overlooked Caber's disruptive innovations, such as
surge pricing and dynamic pricing algorithms. They didn’t align with the preferences of their existing
customer base. This oversight gave Caber an advantage in capturing market share and disrupting the
industry.
2. (a) Rs 1,050, CGST Rs 25, SGST Rs 25; Caber cabs
Reason: Section 9 (5) of the CGST Act 2017 is a charging section under GST for supply of notified services. This
section deals with taxability of supply of services, the output tax of which shall be paid by the electronic commerce
operator (E- COM) if such services are supplied through it, (even though E-COM is not an actual supplier).
Here, Notified services includes Services by way of Transportation of passengers by a Radio Taxi, Motor Cab,
Maxi Cab, Motor Cycle or any other motor vehicle except omnibus therefore provisions of Section 9(5) of CGST is
applicable on Caber Cabs. Therefore, the person liable to pay GST is Caber Cabs.
To find the fare and GST amount if X hailing the ride is not claiming Input Tax Credit (ITC), we'll calculate as
follows:
Driver Fees = Rs 800
- Booking and Convenience Charge = Rs 200
GST rate is CGST 2.5% and 2.5% SGST

Step 1: Calculate the taxable value.

Taxable value = Driver Fees + Booking and Convenience Charge Taxable value = 800 + 200
Taxable value = Rs1,000
Step 2: Calculate the GST amount. GST amount = Taxable value x
GST rateCGST = Rs 25 (1,000 x 2.5/100)
SGST = Rs 25 (1,000 x 2.5/100)

Step 3: Calculate the total fare.

Total fare = Taxable value + GST amount Total fare = Rs1,000 + Rs25 +Rs 25
Total fare = Rs1,050
- The fare charged to the passenger is Rs 1,050, which includes driver fees & booking/convenience charge.
- The GST amount on this fare, when not claiming ITC, is Rs 50, calculated at a rate of 5% on the taxable
value of Rs 1,000.
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3. (c) On Demand Model.
Reason: Caber's strategy of charging a premium for instant booking of prime cars aligns with the On Demand Model.
This model focuses on providing immediate access to products or services, often at a premium price, to meet the
immediate needs and demands of customers. By offering instant booking of prime cars, Caber enhances its
value proposition by providing convenience and accessibility to customers, thereby creating a significant advantage
for the organization within the On Demand Model.
4. (c) Unicorn
Reason: Caber is a privately held company with a valuation of $6.5 billion, which meets the criteria for being
classified as a unicorn. While it has already established its presence in the market, expanded its operations,
and diversified its services, its valuation of $6.5 billion indicates that it has achieved significant growth and is
valued at over $1 billion, thus meeting the criteria for being classified as a unicorn. Therefore, "unicorn" would be the
most appropriate classification for Caber's current growth stage.
5. The company should pass a special resolution in the general meeting to increase the maximum number of directors to 16.
Reason: According to Section 149(1) of the Companies Act, 2013, the maximum number of directors allowed without
a special resolution is 15. However, any increase beyond this limit requires the company to pass a special
resolution as per the First Proviso to Section 149(1). Therefore, option B is correct as it accurately reflects the
legal requirement for increasing the number of directors beyond the statutory limit.
6. Pain & Pain Relivers: Pains describe anything that annoys the customer before, during, or after getting a job done, including
unwanted costs, situations, negative emotions, or risks. These pains can vary in severity. Pain relievers explain how products
and services alleviate specific customer pains at different stages. They highlight how the value proposition addresses these
pains by either eliminating or reducing them.
In the given study, customers often experienced difficulty finding a taxi during peak hours or in less busy areas. Caber
relieved this pain by eliminating the hassle of waiting on the street or making phone calls to book a cab, offering a convenient
and seamless booking experience. With efficient routing algorithms and effective matching mechanisms, Caber significantly
reduced waiting times for passengers, ensuring a quicker and more reliableride. Another major pain point for customers
was concerns over the safety and security of rides, especially during late hours. Caber alleviates this by maintaining stringent
safety protocols and conducting thorough background checks on drivers, ensuring passengers feel confident and secure
when using Caber's services. Traditional taxi services often involved haggling and unpredictable pricing, which Caber
relieved with upfront pricing, allowing passengers to see the estimated fare before confirming the booking, thus
eliminating surprises at the end of the ride . Additionally, the inconvenience of cash payments and the need for exact
change was eliminated with Caber's cashless payment options, offering a secure and hassle-free payment experience.
Passengers can pay for their rides using digital payment methods such as debit cards, mobile wallets, or Caber Money
(Caber’s digital wallet).
Gain & Gain Creators: Gains describe the outcomes or benefits that customers require, expect, or desire, including
unexpected but delightful complementary benefits. These can range from functional utilities and social gains to positive
emotions and cost savings. Some benefits will be more relevant to customers than others, and these elements
collectively describe the customer characteristics observable in the market. Gain creators explain how a business's
products and services generate customer gains by creating these benefits and outcomes.
Caber catered to customer preferences by providing multiple ride options, including economy, premium, and shared
rides, allowing customers to choose based on their needs and budget. Customers expected consistent and high-quality
service, which Caber delivered through features like in-app navigation, trip sharing, and 24x7 customer support,
enhancing the overall ride experience.
Caber's user-friendly app interface simplified the process of booking a ride, offering functional utility by allowing users to
book rides quickly with just a few taps, providing real-time tracking, driver contact information, and estimated arrival
times. Complementary benefits like Caber Rewards and other loyalty programs offered ride discounts, priority support,
and other perks to frequent users, adding value and encouraging repeat usage. Caber's competitive pricing and diverse
ride options made it an affordable and accessible transportation solution for passengers of all budgets.
Additionally, Caber offered flexible earning opportunities for its driver-partners, allowing them to set their own schedules,
choose their preferred working locations, and accept or decline ride requests as per their preferences. This created gains by
providing employment opportunities for drivers and facilitating economic transactions, thereby contributing to the growth
and development of local communities. These social gains were complemented by Caber's environmental contributions.
Caber's ride-sharing options and efficient routing algorithms helped in reducing traffic congestion and carbon emissions,
promoting environmental sustainability.
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7.
Key Partners Key Activities Value Proposition Customer Customer
Relationship Segments

▪ Technology ▪ Communication with ▪ Flexible arning ▪ Review & ▪ Passengers

providers the driver, customers, opportunities for its rating ▪ Drivers
▪ Financial and partners driver- partners ▪ Social ▪ Retailers
Institutions ▪ Hiring drivers and ▪ Safety and security media
▪ Insurance handling their ▪ Convenient and engagement
▪ MAP API insurance and payouts easier transactions ▪ Customer
providers through secure ▪ Opportunity to get an Support
medium insight as to the fare 24x7
▪ Payment
processors Analyzing data to rectify and duration of the ride
any shortcomings ▪ Competitivepricing and
▪ Local authorities
▪ Sales promotions to diverse rideoptions
▪ Drivers who
acquire new ▪ Complementary
owncars
customers benefits
▪ Staffingagency ▪ Platform development
Key Resources ▪ Channels
▪ Platform Caber App
▪ Pricing
algorithm
▪ Brand Staff
Cost Structure Revenue Streams
▪ Legal and settlement cost ▪ Ride transaction fees
▪ Insurance cost ▪ Dynamic/ Surge pricing
▪ Platform development & maintenance ▪ Cancellation fees
▪ Customer support ▪ Caber App interface
▪ Salaries
▪ Sales & marketing cost
▪ Data center and networking expenses
▪ R & D expenses
8. Issue: The issue under consideration is whether depreciation on leased vehicles can be denied to the lessor on the ground that
the vehicles are registered in the name of the lessee and that the lessor is not the actual user of the vehicles.
Provision involved: Section 32 provides the manner of calculation of depreciation and conditions to be fulfilled as
follows:
➢ The assets must be owned, wholly or partly, by the assessee.
➢ The assets must be in use for the business or profession of the taxpayer. If the assets are not used exclusively for
the business, but for other purposes as well, depreciation allowable would be proportionate to the use of business
purpose.
The Income Tax Officer also has the right to determine the proportionate part of the depreciation under section
38 of the Act.
➢ Co-owners can claim depreciation to the extent of the value of the assets owned by each co-owner.
➢ Assessee cannot claim depreciation on the cost of land.
Analysis: Section 32 imposes a twin requirement of “ownership” and “usage for business” as conditions for claim of
depreciation thereunder. As far as usage of the asset is concerned, the section requires that the asset must be used in the
course of business. It does not mandate actual usage by the assessee itself. In this case, the assessee did use the vehicles
in the course of its leasing business. Hence, this requirement of section 32 has been fulfilled, notwithstanding the
fact that the assessee was not the actual user of the vehicles.

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 As long as the assessee-lessor has a right to retain the legal title against the rest of the world, he would be the owner of
the asset in the eyes of law. In this regard, the following provisions of the lease agreement are noteworthy –
• The assessee is the exclusive owner of the vehicle at all points of time;
• The assessee is empowered to repossess the vehicle, in case the lesseecommitted a default;
• At the end of the lease period, the lessee was obliged to return the vehicleto the assessee;
• The assessee had a right of inspection of the vehicle at all times.

The proof of ownership lies in the lease agreement itself, which clearly points in favour of the assessee.
Conclusion: The assessee-lessor was, therefore, entitled to claim depreciation in respect of vehicles leased out since it
has satisfied both the requirements of section 32, namely, ownership of the vehicles and its usage in the course of
business. Hence the contention of Assessing Officer in rejecting the depreciation claim is not valid.
Note - The facts given in the question are similar to the facts in I.C.D.S Ltd. Vs. CIT [2013] 350 ITR 527, wherein the
above issue came up before the Supreme Court. The above answer is based on the rationale of the Supreme Court.

CASE STUDY 2
SG's adherence to its strategic vision is pivotal in maintaining its competitive advantage in the fast fashion industry. Concerns
about the quality of products from fast-fashion companies are common, as these companies often aim to sell more by cutting
costs. However, SG's robust quality control system ensures the delivery of high-quality products, distinguishing it from many of
its competitors.

One of SG's key strategies to sustain its competitive edge is minimizing the time span between design creation and store availability.
The fast fashion industry is accelerating, with companies continuously reducing the time from product design to distribution. The
integration of online platforms and the normalization of one-day delivery are becoming industry standards. SG is committed to
keeping pace with these developments to stay competitive.

Marketing and communication also play crucial roles. Leveraging information technology, SG can identify customer
preferences and reach a broad audience. Social media is a significant tool in building relationships with customers, and SG
utilizes these platforms effectively. It also utilizes it for super-efficient analysis of what’s selling and being said on social media
platforms. However, in a highly competitive industry, SG must constantly innovate, focusing on quality, pricing, and speed to
retain its market position.
SG operates globally, with a substantial presence in Belgium and a significant influence in the fast fashion market. Competing
with brands like RopTop, Rametton, R&M. SG produces over 20,000 designs annually and employs a strategic pricing strategy
to carve out its market niche.
Pricing is critical for SG, which targets a wide market by offering products for women, men, and children. SG’s pricing strategy aims
to attract both the middle class, its largest market share, and wealthier individuals. In the South Asian market, SG’s products
are relatively affordable, catering primarily to the middle class. Conversely, in regions like Europe, SG’s products are more
expensive, targeting consumers with higher social status. In South Asian market, SG employs a below-market or penetrating
pricing strategy, often referred to as a charming price tactic, which involves setting prices lower than the competition to attract a
larger customer base, particularly among the middle class. This approach helps SG capture a significant market shareby appealing
to price-sensitive consumers. In contrast, SG adopts a different approach in the European market by setting prices higher than
those in other regions. This strategy targets consumers who are less sensitive to price and are willing to pay a premium for SG's
fashionable and trendy products. By catering to a wealthier segment that values brand prestige and exclusivity, SG effectively
maximizes its profits in Europe.

SG’s pricing strategy is part of its broader 4Ps marketing mix: product, price, promotion, and place. With a diverse product
range, SG attracts a broad consumer base, launching new products regularly to meet changing fashion demands. This
approach maximizes profit margins by aligning product prices with consumer behavior and preferences.

8
SG has used almost zero advertising and endorsement policy throughout its entire existence, preferring to invest a percentage
of its revenues in opening new stores instead. It spends a meager 0.8 per cent of sales on advertising compared to an
average of 5 per cent by competitors. The brand’s founder Mr. Goyal who is the ninth richest man in the world, has never spoken to
the media nor has in any way advertised SG.

It currently operates in 1113 retail stores across 93 markets (countries). The flagship locations are located in the most critical
markets that appeal to their most loyal shopper. SG uses its store location and store displays as key elements of its marketing strategy.
Its window displays, which showcase the most outstanding pieces in the collection, are also a powerful communication tool designed
by a specialized team. A lot of time and effort is spent designing the window displays to be artistic and attention grabbing.
According to SG’s philosophy of fast fashion, the window displays are constantly changed. This strategy goes down to how the
employees dress as well

– all SG employees are required to wear SG clothes while working in the stores, but these “uniforms” vary across different SG
stores to reflect socio-economic differences in the regions they were located.
SG’s pricing strategy and broad product range have given it an advantage over rivals like R&M and RopTop, enabling global
expansion to meet product demand. A company's pricing strategy significantly impacts market presence and revenue returns. SG’s
strategy aims to meet consumer needs and outperform competitors to maximize returns.
SG, part of the Goyal group, has gained global recognition through its innovative retail strategy. Unlike many competitors, SG
minimizes the time between design conception and store availability to just two weeks, allowing it to respond swiftly to market
demand fluctuations. This agility is enhanced by SG’s vertical integration and avoidance of outsourcing, maintaining control
over production and quality.
SG's business model is meticulously designed to maintain its competitive edge in the fast fashion industry. A key element is the
short lead time, which ensures that SG’s products are always aligned with the latest fashion trends. This is complemented by
the strategy of reduced risks through limited production runs, allowing SG to quickly pivot away from unpopular designs. The
company focuses on producing styles rather than mass-producing clothing, which helps keep its offerings fresh and desirable.
Vertical integration, with manufacturing based in Asia, allows for rapid adjustments in production to meet market demands.
SG’s marketing strategy is innovative, investing in making its products easily accessible rather than relying on traditional
advertising methods. The company is highly reactive, swiftly responding to market demands as they arise, and it emphasizes
affordability, offering stylish clothing at reasonable prices. Interactivity is another crucial aspect, as SG closely engages with consumer
trends through social media, ensuring that it stays in tune with customer preferences. This combination of elements creates a
dynamic and responsive business model that drives SG's success.
Aware of SG’s recent successes in becoming a major player in the global fashion industry, many smartphone and mobile software
manufacturers quickly sought to partner with the company. For instance, since 2012, Ramson smartphones have been sold with
the preinstalled SG mobile application. Ramson Electronics announced the launch of the SG fashion app, which will showcase
the global fashion chain’s latest collections on Android smartphones for the first time. The app allows fashion lovers to browse
the new season must-haves and make immediate purchases. This initiative has significantly contributed to SG's substantial sales
growth. With the SG mobile application installed on their smartphones, customers can conveniently purchase the company’s
products online without needing a computer.

SG’s success stems from a combination of innovative manufacturing and marketing strategies, allowing it to remain competitive.
However, maintaining this edge requires continuous adaptation and technological advancement in marketing activities.

Particulars of SG India (Indian Subsidiary)

Employee Details and Profit Distribution- SG India has a headcount of around 1,000 employees in 2023- 2024. As per the
company’s policy, the employees are given 35 days of privilege leaves (PL), 15 days of sick leaves (SL) and 10 days of casual
leaves (CL). Out of the total PL and sick leaves, 10 PL leaves and 5 sick leaves can be carried forward to next year. Based on
past trends, it has been noted that 200 employees will take 5 days of PL and 2 days of SL and 800 employees will avail 10 days
of PL and 5 days of SL. Indian Subsidiary has been incurring profits since 2018. Therefore, it has decided in 2023-2024 to

9
 distribute profits to its employees @4% during the year. But, due to the employee turnover, the expected pay-out of the Indian
Subsidiary is expected to be around 3.5%. The profits earned during 2023-2024 is Rs 2,000 crores. It has a post-employment
benefit plan also available which is in the nature of defined contribution plan where contribution to the fund amounts to Rs
100 crores which will fall due within 12 months from the end of accounting period. Indian Subsidiary has paid Rs 20 crores to
its employees in 2023-2024.
Corporate Social Responsibility- The management committee of SG India Ltd has issued right shares to all its shareholders which
include employees of the company. Furthermore, SG India issues its own shares to a charity without any consideration to an
NGO which is working for promoting gender equality, empowering women, setting up homes and hostels for women and
orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing
inequalities faced by socially and economically backward group.
Asset Acquisition - On 1st April 2023, SG India acquired machines for production at Gwalior plant under the following terms:

List price of machines Rs 80,00,000

Import duty Rs 5,00,000
Delivery fees Rs 1,00,000
Electrical installation costs Rs 10,00,000
Pre-production testing Rs 5,00,000
Purchase of a five-year maintenance contract with vendor Rs 7,00,000

In addition to the above information, it was granted a trade discount of 10% on the initial list price of the asset and a settlement
discount of 5%, if payment for the machine was received within one month of purchase. The company paid for the plant on 20th
April, 2023. The machines were operating below capacity for 4 months. During this period, production cost of Rs 2,00,000 per
month was being incurred. The proceeds from sales was Rs 1,50,000 per month. Similarly, the proceeds of sales from pre-
production testing was Rs 1,00,000.
Real Estate Transaction- SG India holds a commercial plot in Mumbai which it intends to sell. M/s. Best Broker, a real estate broker
with its Head Office in the USA, has been appointed by SG India to find some suitable buyers for the said commercial plot in
Chennai which is situated at a prime location. M/s. Best Broker identifies Legacy Estate Inc., based out of USA, as the potential
buyer. It is to be noted that Legacy Estate Inc. is controlled from India and hence, is a 'Person Resident in India' under the applicable
provisions of Foreign Exchange Management Act, 1999. A deal is finalised and Legacy Estate Inc. agrees to purchase the
commercial plot for USD 7,00,000 (assuming 1 USD = Rs 84). According to the agreement, SG India is required to pay commission
@ 7% of the sale proceeds to M/s. Best Broker for arranging the sale of commercial plot to Legacy Estate Inc. and
commission is to be remitted in USD to the Head Office of M/s. Best Broker located in USA.
I. Multiple Choice Questions
1. Which of the following best describes how SG's type of vertical integration contributes to its competitive advantage in
the fast fashion industry?
(a) Backward vertical integration, by acquiring raw material suppliers, leading to cost savings through economies of scale.
(b) Forward vertical integration, by opening own retail stores, enhancing customer experience and control over sales
channels.
(c) Backward vertical integration, by maintaining in-house production and control overthe entire supply chain, allowing for
rapid adjustments in production to meet market demands.
(d) Forward vertical integration, by developing unique marketing strategies, increasing brand visibility and customer
loyalty.
2. Which of the following does NOT describe how Kara has maintained their competitive advantage with their focus
strategy?
(a) SG has grown rapidly since its founding, expanding to 1113 stores in 93 markets (countries), making it one of the
most successful fashion retail brands in the world.
(b) SG's success is evident in the profitability of its founder, Mr. Goyal, who is theninth richest man in the world.

10
 (c) SG spends only 0.8% of its sales on advertising, compared to an average of 5% spent by competitors.
(d) SG follows a push model in their inventory and supply chain management tomaintain its market position.
3. Can the Managing Director (MD) of a region, who is also an employee, be provided asalary under Ind AS.
(a) No, because MDs are considered part of key management personnel and should be compensated differently.
(b) Yes, because Ind AS 19 applies to all employees, including those in management positions, provided they are
also employees of the company.
(c) No, because Ind AS 19 only covers lower-level employees, not senior management.
(a) Yes, but only if the MD's salary is disclosed separately from other employees' salaries.
4. Enumerate the legal requirements for the remittance of commission by SG India to M/s. Best Broker and recommend the
most appropriate legal position to ensure compliance with the relevant provisions of the Foreign Exchange Management
Act, 1999:
(a) There is no requirement of obtaining prior permission of Reserve Bank of India (RBI) for remittance of commission
upto USD 25,000 by SG India to M/s. Best Broker but for the balance commission of USD 24,000, prior permission
of RBI is required.
(b) There is no requirement of obtaining prior permission of Reserve Bank of India (RBI) for remittance of commission
upto USD 35,000 by SG India to M/s. Best Broker but for the balance commission of USD 14,000, prior permission
of RBI is required.
(c) There is no requirement of obtaining prior permission of Reserve Bank of India (RBI) for remittance of entire
commission of USD 49,000 by SG India to M/s. Best Broker in line with agreement.
(d) It is mandatory to obtain prior permission of Reserve Bank of India (RBI) for remittance of entire commission of
USD 49,000 by SG India to M/s. Best Broker.
5. Which statement is TRUE regarding the application of Ind AS 102 (Share-based Payment) to Employee Stock Option
Plans (ESOPs) and the issuance of shares to a charity?
(a) ESOPs are covered under Ind AS 102 only if employees receive shares as part of their employment benefits,
regardless they are shareholders.
(b) Ind AS 102 does not apply to the issuance of shares to a charity without consideration, as it is not a share-
based payment transaction.
(c) The issuance of shares to a charity without consideration is covered under Ind AS 102 as a share-based payment
arrangement, while ESOPs are not covered if employees receive shares in their capacity as shareholders.
(d) ESOPs are covered under Ind AS 102 regardless of whether employees receive shares in their capacity as
shareholders, and the issuance of shares to a charity without consideration is not covered under Ind AS 102.
6. ANALYZE and EVALUATE how SG's approach to product differentiation contributes toits competitive advantage in the
fast fashion industry.
7. STATE what would be the treatment of the short-term compensating absences, profit- sharing plan and the defined
contribution plan in the books of SG. Also, STATE what would be the treatment, if the contribution paid from defined
contribution plan exceeds the contribution due. Further, DETERMINE what would be the accounting if the payment from
defined contribution plan does not fall due within 12 months from the end of accounting period.
8. The CFO of the company wants to know at what value would this asset be recognised in the books of accounts. PREPARE
a statement showing him the workings.

ANSWERS TO THE CASE STUDY 2

1. (c) Backward vertical integration, by maintaining in-house production and control over the entire supply chain, allowing
for rapid adjustments in production to meet market demands.
Reason: SG’s backward vertical integration, which involves maintaining in-house production and supply chain control,
allows for rapid and flexible production adjustments. This strategy is crucial in the fast-fashion industry, where
quick response to market demands and trends is essential for maintaining a competitive advantage.
11
2. (d) SG follows a push model in their inventory and supply chain management to maintain its market position.
Reason: The company has grown rapidly, is highly profitable, spends very little on advertising, and relies on
product quality and customer satisfaction rather than branding or persuasion. Moreover, follows a pull model in their
inventory and supply chain management. They create multiple designs every month based on store sales and
current trends. Therefore, option (d) does not describe correctly how SG has maintained their competitive
advantage.
3. (b) Yes, because Ind AS 19 applies to all employees, including those in management positions, provided they are also
employees of the company.
Reason: Ind AS 19 (Employee Benefits) covers all forms of employee benefits, including salaries, for individuals
who are employees of the company, regardless of their position within the company. This includes senior
management and key management personnel like Managing Directors, as long as they are classified as employees.
Therefore, the MD of a region, being an employee, can be provided a salary under Ind AS 19.
4. (d) It is mandatory to obtain prior permission of Reserve Bank of India (RBI) for remittance of entire commission of
USD 49,000 by SG India to M/s. Best Broker.
Reason: According to FEMA Act, 1999, persons other than individuals shall require prior approval of the Reserve
Bank of India for remittance of Commission, per transaction, to agents abroad for sale of residential flats or
commercial plots in India exceeding USD 25,000 or five percent of the inward remittance (USD
7,00,000x5%=USD 35,000) whichever is more. Here, in this case, commission is USD 7,00,000x7%=USD 49,000
which higher than USD 35,000.
5. (c) The issuance of shares to a charity without consideration is covered under Ind AS 102 as a share-based payment
arrangement, while ESOPs are not covered if employees receive shares in their capacity as shareholders.
Reason: Since the employees who have received such shares are acting in the capacity of shareholders and not
as employees, this transaction will not be covered under Ind AS 102. Further, entity issuing its own shares to a
charity without any consideration will be covered under Ind AS [Link] is a share-based payment arrangement,
covered under Ind AS 102 (not a share-based payment transaction).
6. SG's approach to product differentiation significantly contributes to its competitive advantage in several ways.
Firstly, SG's rapid design-to-store turnaround, where new designs appear in stores within two weeks of conception, ensures
that the company constantly offers the latest fashion trends, attracting fashion-conscious consumers and setting SG
apart from competitors who have longer production cycles. This quick response to market demands allows SG to keep
its product offerings fresh and relevant, creating a sense of urgency and exclusivity among customers.
Secondly, SG's vertical integration plays a crucial role in maintaining high product qualityand control over the entire production
process. By keeping a substantial portion of its manufacturing in-house and located in South Asia, SG can quickly adjust
production based on market feedback and emerging trends, reducing lead times and ensuring consistency in quality. This
tight control over the supply chain enables SG to implement its innovative designs swiftly and efficiently, further
differentiating its products from those of competitors who rely heavily on outsourcing.
Thirdly, SG gains a competitive advantage by selling its clothing exclusively through its own retail stores, strategically
located to attract a high volume of customers. This strategy focuses on creating a unique and immersive shopping
experience. SG's stores are designed to resemble high-end fashion boutiques, with carefully curated product displays
that enhance the sense of luxury and exclusivity. This approach not only differentiates SG from competitors but also
reinforces its brand image and appeals to discerning customers seeking a premium shopping experience.
Fourth, SG has a highly evolved data infrastructure, that allows for super-efficient analysis of what’s selling and being
said on social media platforms. This data is used to improve various aspects of the business from product offerings to
service enhancements. The two-way communication between the customer and SG allows for continual improvement of
product and services. This is not common for designer clothes.
Lastly, SG's dynamic pricing strategy enhances its product differentiation by catering to various market segments. In the
South Asian market, SG employs a penetrating pricing strategy to attract middle-class consumers, while in regions like
Europe, SG adopts a premium pricing strategy to target wealthier consumers willing to pay a premium for fashion-
forward items. This regional pricing flexibility allows SG to maximize its market reach and appeal to a broader customer
base, strengthening its competitive position globally.
In summary, SG's rapid turnaround time, vertical integration, exclusive distribution channel and adaptable pricing
12
 strategy collectively reinforce its product differentiation, ensuring that the company remains a leading force in the fast
fashion industry by consistently meeting and exceeding customer expectations.

Evaluation of Strategy
SG’s success has come despite the fact they use almost no advertising. Only 0.8 percent of sales is spent on advertising,
compared to an average of 5 percent spent by their competitors. Their founder, Mr. Goyal, has never spoken to the
media nor personally advertised SG in any way. This points to the success of their products in satisfying the needs of the
customers rather than through branding or persuasion. By making the brand experience meaningful and the exchange valuable,
SG taps the potential of its customers to evangelize the brand. Therefore, SG has been immensely successful in
maintaining their competitive advantage with their differentiation strategy.
7. (a) SG will recognise a liability in its books to the extent of 5 days of PL for 200 employees and 10 days of PL for
remaining 800 employees and 2 days of SL for 200 employees and 5 days of SL for remaining 800 employees in
its books as an unused entitlement that has accumulated in 2023-2024 as short-term compensated absences.
(b) SG will recognize Rs 70 crores (Rs 2,000 x 3.5%) as a liability and expense in its books of account.
(c) When an employee has rendered service to an entity during a period, the entity shall recognise the contribution
payable to a defined contribution plan in exchange for that service.
Under Ind AS 19, the amount of Rs 80 crores will be recognised as a liability (accrued expense), after
deducting any contribution already paid (100-20) and an expense in the statement of profit and loss.
However, if the contribution already paid would have exceeded the contribution due for service before the end of
the reporting period, an entity shall recognise that excess as an asset (prepaid expense).
Since the contributions are payable within 12 months from the end of the year in which the employees render the
related service, they will not be discounted. However, where contributions to a defined contribution plan do not fall due
wholly within twelve months after the end of the period in which the employees render the related service, they
shall be discounted using the discount rate.
8. In accordance with Ind AS 16, all costs required to bring an asset to its present location and condition for its intended use
should be capitalized. Therefore, the initial purchase price of the asset should be:

List price Rs 80,00,000

Less: Trade discount (10%) Rs (8,00,000)
Rs 72,00,000
Import duty Rs 5,00,000
Delivery fees Rs 1,00,000
Electrical installation costs Rs 10,00,000
Pre-production testing (Net of Sale Proceeds of Rs 1,00,000) Rs 4,00,000
Total amount to be capitalized Rs 92,00,000
Maintenance contract is a separate contract to get service, therefore, the maintenance contract cost of Rs 7,00,000 should
be taken as a prepaid expense and charged to the profit or loss over a period of 5 years.
In addition, the settlement discount received of Rs 3,60,000 (Rs 72,00,000 x 5%) is to be shown as other income in the
profit or loss.
The operating loss incurred after commercial launch cannot be capitalised. Hence those figures are being ignored.

CASE STUDY 4
Becky Bond India Limited produces internationally successfully ‘Becky’ and ‘Bond’ brand of fashion clothes respectively for
woman and men. The company has acquired a global reputation for good-quality, well-designed and reasonably priced fashion
clothing. Like other fashion clothing companies, Becky Bond continually design and produce new clothes for the fashion market.
During the course of one year, the company produces over 15,000 new fashion designs, and it has a large team of fashion
designers. The company’s top designers, who are based in Paris and Moscow, have an international reputation. These top
designers bring international acclaim and expertise, further enhancing the brand’s appeal and global market presence.

13
Becky Bond India Limited has established itself as a leader in the global fashion industry, renowned for its innovation, quality,
and style. The company's success is built on a foundation of meticulous craftsmanship and a keen eye for emerging fashion
trends. Becky Bond's clothing lines, known for their sophisticated designs and high-quality materials, resonate well with both fashion-
forward consumers and those seeking classic styles. This dual appeal has allowed Becky Bond to carve out a significant niche
in the crowded fashion marketplace. Becky Bond is not just a clothing manufacturer; it is a trendsetter in the fashion industry. By
hosting fashion shows in major cities around the world and participating in international fashion weeks, Becky Bond showcases
its latest designs to global audiences, influencing fashion trends and setting new standards in design excellence.
The company’s distribution strategy is as robust as its design capabilities. Becky Bond primarily sells its products through a
network of retail stores, some of which are company-managed, ensuring a consistent retail experience that aligns closely with
the brand’s identity. In addition to these dedicated stores, the company also partners with major department stores, securing
dedicated spaces to reach a broader audience. This dual-channel retail approach allows Becky Bond to maintain strong control
over its brand while also benefiting from the extensive foot traffic and customer base of larger retail establishments.
Currently, the company operates its own retail stores, with the number increasing each year, while its presence in department
stores is declining annually. Most of these stores are located in Mumbai. Sales from Pune currently account for less than 10%
of the company's total sales. As a prototype, the company has also established 'e-shops' for online selling.
Becky Bond India Limited stands as one of India’s leading branded fashion and lifestyle entities, with an impressive portfolio of top
fashion brands. As the country’s leading pure-play fashion powerhouse, the company commands over 10.8 Mn. Sq. ft. of retail
space. This strong and vast infrastructure ensures that the company meet the growing needs of expanding base of brand-
conscious consumers. The performance of company in FY20X2-X3 is a testament to resilience and determination. After
weathering the impacts of the pandemic for two years, Becky Bond India Limited have made significant strides in both expansion
and sales growth, surpassing the previous year’s figures despite the macroeconomic challenges that dampened demand in the
fiscal year’s second half. The success has been driven by a targeted approach to growth, prioritizing distribution expansion,
product innovation, customer engagement, and brand enhancement. The company’s last year revenue witnessed a 53% YoY
growth and EBIDTA growth of 34% over the last year.
Although all clothing products are designed by the company’s own staff, most manufacturing is outsourced to small
manufacturing companies. Most of these manufacturers are located in Nagpur or Thane. The company's policy of relying on large
numbers of small suppliers has been successful in the past, but more recently there has been disagreements with a number of
suppliers who have been demanding higher prices for their work due to increases in their own costs. The rising prices of cotton
and fuel in particular have been a cause of concern for manufacturers. Becky Bond India Limited also has its own manufacturing
subsidiary, located near Pune, but this produces less than 5% of the company’s total annual requirements by volume.
Becky Bond’s strong reputation in the market has been built largely on the success of its fashion designs. The company displays its
fashions regularly at the major fashion fairs around the world, and its design team members are continually searching for new
fashion ideas. Most fashion products are designed in advance of each season, and there are four fashion seasons each year.
Orders are placed with manufacturers and the manufactured items are delivered to a central distribution centre that the
company operates near Pune. Goods are either sent to department stores direct from Pune, or they are sent to a subsidiary
distribution centre, from where they are sent to company’s own stores and department stores. However, many department
stores reduced their pre-orders of items in 20X4-20X5 and placed additional (supplementary) orders with the company later in
the fashion season, when they knew what items were selling well and which were not.
The company’s design team have been experimenting with a new just-in-time (JIT) system of purchasing and production for some
of its fashion items. This JIT system is similar to the system used by the international fashion goods producers. With this system,
only limited quantities of products are manufactured for the start of each season. Members of the sales team in each region
check the strength of demand for each product and inform Head Office in Pune which products are selling well, and which are
selling badly. Orders for additional quantities of the popular items are then placed with manufacturers and distributed as quickly
as possible to meet the sales demand. Experiments with this Just-in-time purchasing/manufacturing system have been only
partially successful, due to the long lead time between placing orders with small manufacturers and getting delivery into the
distribution centre near Pune.

14
The Company was listed on 28 September 20X3 on the BSE. Before the upcoming Board Meeting post listing, the CFO called
two of his team members – Aarti and Namrata who are expert in financial reporting and business strategy. Namrata mentioned
that the Company’s Board of Directors set a financial target to achieve a 20% increase of EBITDA to sales each year. It is
disappointing that this target could not be achieved, and alternative strategies to improve financial performance should be
considered. Namrata also mentioned that overall, the company reported PBT in the current quarter and losses are expected thereafter.
The following table shows the quarterly loss/ profits:
INR lakhs
QE June QE September QE December QE March Year ended
20X3 20X3 20X3* 20X4* 20X3 to 20X4*
Profit before tax (350) 850 (300) (200) Nil
*Projected
Namrata further mentioned that SEBI (LODR) Regulations, 2015 have prescribed a format for submitting financial results. Namrata
has prepared the financial results as follows:
INR lakhs

QE *QE *QE YTD *YTD *Year

September June September September September ended 31
20X3 20X3 20X2 20X3 20X2 March
20X3
*The Company was not listed in these period
Besides, Becky Bond Limited also established a grievance redressal mechanism to address investor complaints. It mandated the
filing of a statement detailing these complaints, as well as other corporate governance requirements, and the submission of
quarterly statements to the stock exchange covering matters related to public issues, rights issues, preferential issues [Link]
November 20X3.
Aarti mentioned that Pune has been identified as an important region for future growth, but there are possibilities for further
expansion in Mumbai as their disposable income have improved. The Design Director believes that the company should review its
product range and change the emphasis of its sales efforts from some products to others.
The CFO mentioned that the main competition for Becky Bond are from ‘Gen Z’, ‘Caterpillar’ and ‘Beat It’. Gen Z's success has
been built on a rapid product development cycle and a fast production cycle based on JIT. It uses a large number of small
manufacturers in the same area, where ‘Gen Z’ has a large and modern distribution centre. ‘Caterpillar’ has also been highly
successful in the Mumbai fashion market. ‘Beat It’ has been left behind these two rivals, but is trying to recover lost ground
through an expensive advertising campaign and refurbishment of many of its stores. ‘Beat It’’s turnover has doubled in the past
decade, whereas the turnover at the company has risen 3-fold, ‘Caterpillar’ has increased 4-fold and at ‘Gen Z’ by six times.
‘Beat It’ faces a significant challenge, as does the Company: in the large Mumbai market, their relatively slow design and
distribution systems cannot keep up with consumer demand for fast, affordable copies of the latest popular fashions. Almost half of
‘Beat It’’s sales occur in Mumbai. However, the company is developing a strategy for further expansion in Pune, where its brand
name is very strong. The CFO mentioned that the Board is considering a number of alternative strategies to improve company
performance including the following:
▪ Expand business in Pune as quickly as possible and aim to acquire a 25% share of the market for fashion goods within 5
years. A strategic problem with expanding in Pune is that customers are used to paying much lower prices for their clothes,
and it may be necessary to develop a new line of products with a new brand name, to sell at lower prices. The market for
fashion goods is relatively new and is still developing, as levels of wealth among consumers in Pune rise. In order to gain
market share Becky Bond will probably have to enter into a strategic alliance or a merger with a partner in the Pune, which
has an established brand name and an extensive distribution network.

▪ Expand business in South Mumbai with the company's existing product ranges. There are several ways in which this might
be done. One approach would be to improve the shopping experience for customers by investing more in stores and customer
service, in order to increase sales volume. Alternatively, the company could develop new methods of sales and
distribution, particularly online sales.
15
 Developing new product ranges for existing markets. Senior members of the design team are excited about the sales potential
for “environmentally friendly fashion” or “sustainable fashion”, and for other product ranges such as denim fashion goods,
which the company only recently began to design and sell. Sunglasses and swimwear are also consideredto be
potential areas for new product development.

Consolidation strategy based on improving efficiency and reducing costs. There are several ways in which this might be
achieved. One strategy would be to consolidate the sourcing of goods, and using a smaller number of suppliers, in order to
achieve lower prices in return for bigger orders.
I. Multiple Choice Questions
1. By what time should Becky Bond India Limited submit financial results for the QE September 20X3 to the stock
exchange?
(a) Submission of financial results is not required since the Company has listed few days before end of the quarter.
(b) Submission of financial results is required within 45 days from the date of listing.
(c) Submission of financial results is required within 45 days from the end of thequarter.
(d) Submission of financial results is required within 60 days from the end of thequarter.

2. Which of the following is an unpublished price sensitive information as per SEBI (Prohibition of Insider Trading)
Regulation, 2015?
(a) Financial Results (b) Changes in finance and accounts team

(c) Significant improvement of business of an immaterial subsidiary (d) Submitting Annual Report to Stock exchange

3. Becky Bond India Limited had the start in the quarter with the listing of it with 5 investor complaints. During the quarter, it
received 15 new complaints. By the end of the quarter, it resolved 12 complaints. Determine how many investor complaints
remain unresolved at the end of the quarter?
(a) 5 (b) 8 (c) 15 (d) 3

4. As per the SEBI(LODR)Regulations, 2015, company must submit its quarterly compliance report on corporate governance.
The quarter ended on 31st March 20X4. By which date should it submit its compliance report to the BSE?

(a) 15th April 20X4 (b) 21st April 20X4 (c) 22nd April 20X4 (d) 30th April 20X4

5. Why is it necessary for Becky Bond to create a separate brand for lower-priced products when expanding in Pune?
(a) To increase the production cost of the existing brand's products.

(b) To align with the high pricing strategy of the existing brand.

(c) To avoid diluting the premium image of the existing brand.

(d) To compete with luxury fashion brands in Pune.

6. When should Becky Bond Limited submit its shareholding pattern statement to therecognized stock exchange?
(a) 8th November 20X3 (b) 20th November 20X3 (c) 19th November 20X3 (d) 31st March 2024
7. The applicable income tax rate is 30%. The CFO is of the view that the no tax expense should be recognised in the quarter
and year to date ended 30 September 20X4 as no income tax is payable for the entire year? Is the CFO correct and if not,
please describe your rationel and also state the amount of income tax that should be recognised?

8. Assess the competitive environment in the segment of the fashion industry in which Becky Bond operates using Porter’s
Five Forces model.
9. EVALUATE the supply chain of Becky Bond, identifying its current weaknesses and suggesting ways to overcome them.
ANSWERS TO THE CASE STUDY 4
1. (c) Submission of financial results is required within 45 days from the end of the quarter
Reason: Regulation 33(3) of SEBI (LODR) Regulations, 2015 requires submission of financial results within
45 days from the end of the quarter other than the last quarter.

16
2. (a) Financial Results
Reason: Under Regulation 2(1)(n) of SEBI (Prohibition of Insider Trading) Regulation, 2015 financial results is an
unpublished price sensitive information.

3. (b) 8
Reason: At the beginning of the quarter, there were 5 complaints. During the quarter, 15 new complaints were
received, making a total of 20 complaints. Out of these, 12 were resolved, leaving 8 unresolved (20 - 12 = 8).
4. (b) 21st April 20X4
Reason: According to Regulation 27(2), the listed entity must submit the quarterly compliance report on corporate
governance within 21 days from the end of the quarter. Since the quarter ended on 31st March 20X4, the
deadline is 21st April 20X4.
5. (c) To avoid diluting the premium image of the existing brand.
Reason: By introducing a new line with a different brand name, Becky Bond can cater to the price-sensitive
market in Pune without compromising the perceived value and exclusivity of its original brand.
6. (b) 20th November 20X3
Reason: According to Regulation 31(1), the listed entity must submit the shareholding pattern statement, within 10
days of any capital restructuring, which would be by 20th November 20X3 (10 days after 10th November 20X3).
To comply fully with the regulation, the company should submit the shareholding pattern statement by 20th
November 20X3

7. Paragraph 30(c) of Ind AS 34, income tax expense is recognised in each interim period based on the best estimate of the
weighted average annual income tax rate expected for the full financial year. Amounts accrued for income tax expense in
one interim period may have to be adjusted in a subsequent interim period of that financial year if the estimate of the
annual income tax rate changes.

The general approach of estimating the effective tax rate for the year should be used even where, for example, an
entity’s result in the current interim period of the year is expected to be wholly offset by its result in the future interim
periods of the year. The consequence of this approach is that, conceptually, even if the overall result for the year was
expected to be nil position, an effective tax rate exists still needs to be applied to the interim period. This is outlined
below: (INR in lakhs)
QE June QE QE QE Year ended
20X3 September December March 20X3 to
20X3 20X3 20X4 20X4
(Loss)/ Profit before tax (350) 850 (300) (200) Nil
Tax rate 30% 30% 30% 30% 30%
Tax charge/(credit) (105) 255 (90) (60) Nil
The management’s contention that since the net income for the year will be zero no income tax expense shall be
charged quarterly in the interim financial report, is not correct. Here the effective tax rate would be 30% as it will lead
to Nil tax charge. Therefore, income tax expense will be recognized in each interim quarter based on this rate only.
Accordingly tax change for quarter ended 30 th September would be INR 255 lakh.
8. An overview of the competitive forces in the industry is as follows:
1. Threat of New Entrants: While it is possible for small fashion designers to enter the market, new entrants face
challenges in finding a sufficient number of retailers willing to sell their products, and their designs must appeal to
fashion-conscious customers. There may be a greater threat from small fashion designers and manufacturers
who are trying to grow their businesses rather than from entirely new entrants.

2. Bargaining Power of Customers: Customers are either the end consumers or department stores. The number of
wholesale outlets has been falling, suggesting that department stores are switching to competitors, which may give
department stores a reasonable amount of bargaining power over Becky Bond. For own store sales and e-shopping,
17
 customers will only buy the company’s goods if they are attracted by the design and the price, giving customers
some bargaining power.

3. Bargaining Power of Suppliers: Becky Bond’s suppliers are mainly small manufacturing firms in Nagpur and
Thane. These suppliers may not have strong bargaining power, except that rising manufacturing costs mean they
are demanding higher prices for their goods.

4. Threat of Substitutes: There are probably no direct substitutes for fashion clothes, although customers may be
able to switch to cheaper fashion goods retailers. There is insufficient information to assess the strength of this
force inthe industry definitively.

5. Rivalry Among Existing Competitors: Competition between fashion goods producers seems to be strong,
although the intensity may vary between different parts of the world. In Mumbai, the main competition comes
from ‘Gen Z’, ‘Caterpillar’, and ‘Beat It’. These competitors may compete as much on fashion design as on price. It
seems probable that competition between firms keeps prices lower than they might otherwise be.

Assessing competitive environment, Becky Bond can develop strategies to strengthen its competitive position within the
fashion industry.
9. The main supply chain for Becky Bond is relatively short, starting with producers of materials for fashion clothes. These
materials are purchased by businesses that manufacture the clothing for Becky Bond. The manufacturers are mainly small
independent firms in Nagpur and Thane, although the company has its own small manufacturing subsidiary near Pune,
which produces less than 5% of its total annual requirements. The manufactured goods are transported to the company’s
distribution centre in Pune. Becky Bond buys the manufactured clothes that it has designed and distributes them to
retailers directly from Pune. Retailers may be department stores or its own stores. There are also some e-sales direct
to customers.

However, there are some weaknesses in the supply chain. Most sales are in Mumbai, but most manufacturing is in
Nagpur and Thane. Although these areas may be cheaper for manufacturing, the costs of transporting the clothes to the
distribution centre in Pune may be quite high. Additionally, there is no information about the efficiency of Becky Bond’s
delivery system, but operating with two distribution centres may be inefficient and slow down the transfer of
manufactured goods to stores. Its competitor, ‘Gen Z’, has a manufacturing centre in Mumbai and a modern distribution
system, which gives ‘Gen Z’ a strategic advantage because of lower transport costs and quicker distribution. ‘Gen Z’
operates a just-in-time system for ordering goods from manufacturers, and this seems to be more successful than Becky
Bond’s attempts to do the same thing.

Furthermore, reliance on numerous small suppliers has led to longer lead times and recent disputes over price
increases. The supply chain operates slowly between Becky Bond and its manufacturers, putting the company at a
disadvantage compared with ‘Gen Z’ and ‘Caterpillar’. The just-in-time (JIT) system has only been partially successful
due to long lead times from small manufacturers to the central distribution centre. Department stores' tendency to
place supplementary orders late in the season complicates inventory management and distribution planning.

To overcome these supply chain weaknesses, Becky Bond can implement several strategies. Forming strategic
partnerships with key suppliers can ensure more consistent pricing and supply, possibly involving longer-term contracts
or volume commitments. Reducing the number of suppliers to a manageable few who can offer better terms for larger
orders can help negotiate lower prices and improve lead times. Improving the just-in-time system by collaborating closely
with suppliers to shorten lead times and increase responsiveness to market demands is essential. Maintaining a
strategic inventory buffer for fast-moving items can quickly fulfil supplementary orders from department stores without
significant delays. Streamlining operations to reduce costs, possibly by consolidating manufacturing processes and
improving logistics, will be beneficial. Lastly, investing in technology to enhance supply chain visibility and efficiency,
from design and manufacturing to distribution and sales, can significantly improve overall performance.

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 CASE STUDY 7
The Connect Group, one of India's largest conglomerates, was founded by Ramlal Jain in 1966. Initially starting as a small textile
company named Connect Commercial Corporation, it rapidly expanded its operations into diverse sectors such as
petrochemicals, refining, oil, telecommunications, retail, and infrastructure.
Ramlal Jain’s visionary leadership and innovative business strategies transformed the company into a significant player in the
Indian economy. Following his passing in 2002, the group was divided between his sons, Vansh Jain and Suhaan Jain, leading
to the formation of Connect Industries under Suhaan Jain and Connect Group under Vansh Jain, each continuing to grow and
diversify their respective business interests.
The Connect Group is among India's top private sector business houses serving over 250 million customers across
telecommunications, power, financial services, infrastructure, media and entertainment, and healthcare sectors. The Connect
Group positively influences the lives of one in every 5 aspiring Indians across more than 24,000 cities and towns and 4,20,000
villages.
The Connect Group strongly believes that it has a pivotal role to play in shaping the destiny of the nation. Through its various
consumer-facing businesses, the Group provides a robust platform to every Indian to realize his/ her potential through its state-
of-the-art products and services. The Group enjoys the unparalleled trust, faith and confidence of its customers, and is one of
the largest employers in the country with a young, highly-trained and motivated workforce, with an average age of 35 years.

The vision of the group is “To build a global enterprise, and a great future for country, to give millions
of talents the power to shape their destiny”
One of the Connect Group company, Connect India Ltd. (CI) entered the Indian telecommunications landscape in 2002.
Leveraging its substantial resources, CI embarked on an ambitious journey to revolutionize connectivity in India. By rapidly
expanding its network infrastructure and introducing both GSM and CDMA services, CI aimed to bridge the digital divide and
bring affordable communication solutions to every corner of the country. Positioned as a disruptor in the market, CI challenged the
status quo of traditional landline communication, offering consumers a glimpse of the transformative power of mobile technology.
CI's ascent to prominence was marked by its innovative marketing strategy, which centered around bundling GSM handsets
with Connect connections. This strategic move was not merely about selling handsets; it was a bold attempt to democratize
access to mobile communication. By offering affordable handsets bundled with CI's telecom services, the company effectively
lowered the entry barrier for millions of potential subscribers. This approach tapped into the aspirations of a burgeoning
middle class eager to embrace modern communication technologies. As consumers flocked to avail themselves of these
bundled offerings, the demand for traditional landline connections witnessed a precipitous decline, signaling a strong shift in the
telecommunications landscape.
CI's disruptive approach had a profound impact on its competitors in the telecommunications sector. Traditional landline providers,
such as RWNL, faced significant challenges as consumers increasingly opted for CI's mobile offerings. The aggressive pricing and
innovative service packages introduced by CI forced competitors to rethink their strategies and offerings. In response,
competitors had to lower their tariffs, improve service quality, and explore new revenue streams to remain competitive in the
evolving market. CI faced intense competition from other major telecom players like Dtel, M Phone, and IA Cellular. Despite their
efforts, many competitors struggled to keep pace with CI's rapid expansion and innovation, leading to a reshuffling of market
dynamics and heightened competition across the sector.
In the 2010 spectrum auction, CI secured 3G licenses for three cities with a licensing fee of Rs57 billion. By leveraging MIMO
technology in 2011, CI improved the quality of its 3G service, achieving data rates up to 28 Mbit/s. In 2013, CI signed a multi-
year managed services agreement (MSA) with Startel to manage services of wireline and wireless network of 1,20,000 kilometres of
fiber and mobile infrastructure in 11 telecom circles in India. This arrangement was a smooth business relationship until 2016,
post which CI struggled to pay the dues. This has been seen as an effect of Connect XG that disrupted the Indian telecom
industry with its aggressive pricing after its commercial launch in September 2016 that affected all leading telecom players. By
2016, the company discontinued its CDMA operations, migrating subscribers to GSM and LTE networks. The same year, CI
acquired Digicable, India’s largest cable network, integrating it into a new entity, Connect Digicom, to bolster its DTH TV, IPTV,
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 and broadband services. Additionally, CI acquired Sistem Sure TeleServices Limited (SSTL), gaining SSTL’s spectrum in the 850
MHz band and its subscriber base. In September 2016, CI announced a merger with Freecel, which was expected to help repay
Rs250 billion of debt. Despite approvals from regulatory bodies, the deal fell through in October 2017 due to delays and
competitive pressures. The failed merger exacerbated CI’s financial distress, leading to the redundancy of employees and the
discontinuation of voice services in December 2017.
CI’s financial problems worsened when it couldn't pay Startel under a managed services agreement. Startel took the issue to the
National Company Law Tribunal (NCLT) to recover Rs12 billion, which led to insolvency proceedings. Even though a settlement
was reached, CI failed to comply, resulting in contempt of court proceedings. Suhaan Jain intervened with a bailout (financial
aid) to prevent legal consequences, highlighting the importance of strategic crisis management. Auditors were very concerned
about the risk of fraudulent reporting at CI because of its financial troubles. The company's struggle to meet its financial
obligations might have led to a temptation to manipulate financial statements to look better than they actually were.
Despite its promising start, CI's journey was fraught with challenges that ultimately led to its decline. Intense competition from both
established players and disruptive entrants, coupled with rapid technological advancements, eroded CI's market share and
profitability. Additionally, the company grappled with a substantial debt burden incurred during its expansion phase. Efforts to
alleviate financial pressures through strategic partnerships and merger attempts were thwarted by regulatory hurdles and
internal disagreements. In May 2019, CI succumbed to its financial woes, filing for bankruptcy under the Insolvency and Bankruptcy
Code. This marked a sobering end to a once-promising venture and underscored the volatile and complex nature of the
telecommunications industry, where innovation and disruption often come hand in hand with uncertainty and risk. By 2020, a
consortium of companies bid over $250 million for CI’s assets. Ultimately, Suhaan Jain's Connect XG acquired these assets for
Rs3,700 crores in 2021. This acquisition was part of XG's broader strategy to consolidate its market position and expand its
telecom infrastructure. As a part of this expansion, Connect XG acquired the right to use spectrum for high frequency bands on
April 1, 2020, by making an upfront payment of Rs 1,000 crores. The spectrum was valid for a period of 20 years.
In the previous year 2023-24, the Connect XG transferred part of the spectrum for a consideration of Rs 300 crores when 17
years of the spectrum period were still remaining. After the spectrum was sold, there was news in the industry that Moonlink Telecom
was interested in buying the spectrum sold for a whopping amount of Rs 900 crores. However, Moonlink Telecom was embroiled in
a legal battle with the government over a disputed amount of Rs2,000 crores, complicating their potential acquisition.
I. Multiple Choice Questions
1. With reference to the case, which term best describes Connect XG's strategy of using aggressive pricing to enter the
telecom market and target the lowest market segments? Additionally, CI's initial strategy to offer GSM handsets bundled
with their telecom services was an example of which strategy:
(a) XG's strategy - New-market disruption; CI's strategy - Low-end disruption
(b) XG's strategy - Market penetration; CI's strategy - Technological innovation
(c) XG's strategy - Low-end disruption; CI's strategy - New-market disruption
(d) XG's strategy - Technological innovation; CI's strategy - Market penetration

2. To gain competitive advantage, which approaches were most likely followed by CI?
(a) It improved the quality and speed.
(b) It focused on enhancing only their call quality.
(c) It acquired additional spectrum and subscribers.
(d) It started value package including reduced the cost of basic services.
Options:
(a) (i) & (ii) (b) (i) & (iii) (c) (iii) & (iv) (d) (i), (ii) & (iv)

3. CI acquired Digicable, India’s largest cable network, integrating it into a new entity, Connect Digicom, to bolster its DTH
TV, IPTV, and broadband services. This is most likely an example of which type of integration?
(a) Horizontal integration (b) Backward integration (c) Forward integration (d)Diversification in supply chain
4. In the context of mergers and acquisitions (M&A), which financial metric would be most relevant for assessing the potential
value of CI as an acquisition target?
(a) Price-to-Earnings (P/E) Ratio (b) Debt-to-Equity (D/E) Ratio

(b) Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Margin (d) Return on Investment (ROI)

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5. Considering the financial distress faced by Connect India, which risk factor should auditors prioritize during the audit
engagement?
(a) The risk of inventory obsolescence due to rapid technological advancements.
(b) The risk of fraudulent reporting to mask financial difficulties.
(c) The risk of non-compliance with labor laws leading to legal liabilities.
(d) The risk of inadequate documentation of fixed asset impairments.

6. Given the provided facts, if the transaction involving Connect XG's sale of spectrum to Moonlink Telecom had occurred,
comment on the legal position regarding such a transaction under the Insolvency and Bankruptcy Code (IBC), 2016
(a) Connect XG's sale of the spectrum for Rs 300 crores is invalid as the IBC requires that any transfer of assets must
be done at fair market value, which is closer to Rs 900 crores in this case.

(b) Moonlink Telecom cannot purchase the spectrum because they are involved in a legal battle over a disputed amount,
which under the IBC, 2016, disqualifies them from acquiring assets.

(c) The IBC, 2016 does not have any direct provisions regarding the sale of spectrum, thus, the sale by Connect XG for Rs
300 crore will be valid, irrespective of Moonlink Telecom’s interest.
(d) Moonlink Telecom can purchase the spectrum if they resolve their legal dispute with the government and prove
their financial stability under the IBC, 2016.

7. Using Porter’s Five Forces framework, ANALYZE how intense competitive rivalry and the high bargaining power of buyers in
the telecommunications market contributed to the decline of CI.
8. Evaluate the effectiveness of valuation techniques in the acquisition of Connect India by XG.

9. (a) Compute the deduction available to Connect XG under Income-tax Act, 1961 for the previous year 2023-24 and
the amount chargeable to tax, if any, assuming that the company has been claiming deduction since the year of
acquisition of the spectrum.
(b) Suppose if the part of the spectrum was sold for Rs 900 crores as per the bid by Moonlink Telecom, then what
would be the taxability under Income-tax Act, 1961.

ANSWERS TO THE CASE STUDY 7

(1) (c) XG's strategy - Low-end disruption; CI's strategy - New-market disruption
Reason: Low-end disruption occurs when a company uses a low-cost business model to enter at the bottom of
an existing market and claim a segment. As the entrant company claims the lowest market segment i.e. a lower
profit-making segment for the incumbents, the other existing companies typically retreat upmarket, means that
they move further "upstream" where profit margins are higher. Therefore it creates a situation where the other
players in the industry actually are motivated to flee rather than fight you.

New-market disruption occurs when a new entrant expands the market by targeting customers who have never
used a similar product before. The disruptive company creates a new market by making its products more
accessible or less expensive.
2. (b) (i) & (iii)
Reason: The introduction of MIMO technology by CI improved the quality and speed of their 3G services,
providing a better user experience and differentiating their offerings from those of competitors who did not offer
similar technology enhancements. The acquisition of SSTL provided CI with additional spectrum and subscribers,
strengthening its market position and expanding its service capabilities, thereby contributing to its competitive
advantage.

3. (a) Horizontal integration

Reason In this case, CI telecom company, which operates in the telecommunications industry, acquired
Digicable, a company in the cable network sector, which is at the same level in the supply chain.
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4. (c) Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Margin
Reason: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Margin Explanation: In the
case of Connect India (CI), assessing its potential value as an acquisition target would involve evaluating its
operational efficiency and profitability. The EBITDA Margin, which indicates a company's earnings before non-
operating expenses, provides valuable insights into CI's core operational performance, making it a relevant metric for
potential acquirers during M&A analysis.

5. (b) The risk of fraudulent reporting to mask financial difficulties.

Reason: Given Connect India' financial distress, auditors should prioritize assessing the risk of fraudulent reporting
aimed at concealing the company's true financial position. This includes scrutinizing financial statements for
potential misstatements and ensuring transparency in reporting.
6. (d) Moonlink Telecom can purchase the spectrum if they resolve their legal dispute with the government and prove their
financial stability under the IBC, 2016.
Reason: The Insolvency and Bankruptcy Code (IBC), 2016, primarily deals with the resolution of insolvency and
bankruptcy for individuals and companies. It ensures that assets are managed efficiently and that the interests of
creditors and other stakeholders are protected.

The IBC, 2016, would allow Moonlink Telecom to acquire the spectrum if they can resolve their ongoing legal issues and
demonstrate their financial capability and stability. This aligns with the objective of the IBC to ensure orderly resolution
of insolvency and protection of stakeholders' interests, including ensuring that buyers are financially stable.
Hence, Option D is the most appropriate answer based on the IBC Code, 2016.
7. Porter’s Five Forces is a framework for analyzing the competitive forces within an industry, which can help understand the
intensity of competition and profitability. Applying this model to Connect India (CI) offers insights into the dynamics that
contributed to its rise and eventual downfall.

I. Competitive Rivalry within the Industry: The intensity of competitive rivalry within the telecom industry was high,
driven by several key factors. Market competition was fierce, with CI facing significant challenges from major players
like Dtel, M Phone, and IA Cellular. The competition intensified further with the entry of Connect XG in 2016, whose
aggressive pricing and free services
disrupted the market dynamics. This led to widespread price wars, compelling companies, including CI, to
drastically lower tariffs to retain their market share, consequently reducing profit margins across the industry.
Additionally, rapid technological advancements, such as the shift from CDMA to GSM and the advent of 4G,
required continuous investment in infrastructure upgrades, further escalating operational costs and competition. In
conclusion, the telecom industry was characterized by intense rivalry due to aggressive market competition,
frequent price wars, and the need for constant technological advancements.
II. Threat of New Entrants: The threat of new entrants in the telecom industry was moderate to high. While significant
capital investment for infrastructure and spectrum licenses created high barriers to entry, regulatory changes and
emerging market opportunities could lower these barriers. This dynamic was exemplified by the entry of Connect XG,
which, backed by substantial capital and innovative strategies, managed to disrupt the market despite these high
barriers. XG's successful penetration illustrated how new players with adequate resources could overcome traditional
entry barriers and rapidly capture market share. In conclusion, although the telecom industry had high barriers to
entry, the potential for market disruption by well-funded and innovative new entrants remained a significant threat.

III. Bargaining Power of Suppliers: The bargaining power of suppliers in the telecom industry was low to moderate.
Telecom companies depended on equipment suppliers, network infrastructure providers, and technology vendors,
but the global abundance of these suppliers diminished the bargaining power of any single supplier. Large telecom
companies like CI typically leveraged their scale and volume of business to negotiate favorable terms in contract
negotiations. However, specialized technology providers or exclusive suppliers could exert more influence due to their

22
 unique offerings. Additionally, the need to acquire spectrum licenses through government auctions added another
layer of supplier dependence, as telecom companies had to navigate regulatory frameworks and competitive
bidding processes. In conclusion, although the overall bargaining power of suppliers was relatively low, specialized
providers and the requirement to secure spectrum licenses could exert more influence in certain areas.
IV. Bargaining Power of Buyers: The bargaining power of buyers in the Indian telecom market was high. Consumers
had numerous options due to the intense competition among telecom providers, allowing them to easily switch providers
for better pricing or service quality. The market was highly price-sensitive, with customers favoring low-cost options,
which pressured telecom providers to offer competitive pricing, often at the expense of their margins. Additionally,
with multiple providers offering similar services, service quality became a critical differentiation factor.
Consequently, CI had to continuously improve its service quality and customer experience to retain its subscriber
base. In conclusion, the high bargaining power of buyers in the Indian telecom market forced providers to prioritize
competitive pricing and superior service quality to maintain customer loyalty.
V. Threat of Substitutes: The threat of substitutes in the telecom industry was moderate. Alternative communication
methods, such as internet-based services, posed a significant threat as increasing internet penetration made these
services more viable alternatives to traditional telecom offerings. Additionally, the technological convergence of
various platforms, including the internet, mobile telephony, and OTT services, broadened the competitive landscape for
traditional telecom services. This convergence forced telecom companies to continuously innovate and adapt to
remain relevant. In conclusion, while the threat from substitutes was moderate, the ongoing technological
convergence and rising popularity of internet-based communication necessitated persistent innovation from
traditional telecom providers.

Porter’s Five Forces analysis of Connect India highlighted a highly competitive and dynamic environment. CI's
decline could be attributed to several key factors: intense competitive rivalry, significant threats from new entrants like
Connect XG, and high bargaining power of buyers in a competitive market landscape. Although the bargaining power
of suppliers remained relatively low, the rising threat of substitutes from digital communication technologies
further pressured traditional telecom business models. CI's inability to effectively navigate these competitive
forces, combined with strategic missteps and financial mismanagement, ultimately led to its downfall.

8. Valuing distressed companies like Connect India (CI) for acquisition by XG requires adapting traditional valuation
methodologies to account for the specific risks and
uncertainties that these companies face. This involves modifications to the conventional valuation methods to address the
issues that arise due to financial and operational distress. Here, we will explore the application of four advanced financial
management techniques to the valuation of CI.
1. Modified Discounted Cash Flow (DCF) Valuation: This method requires coming up with probability distributions
for the cashflows (across all possible outcomes) to estimate the expected cashflow in each period. While computing
this cash flow the likelihood of default should be adjusted for. In conjunction with these cashflow estimates, discount
rates are also estimated:
 Using updated debt to equity ratios and unlevered beta to estimate the cost of equity.

 Using updated measures of the default risk of the firm to estimate the cost of debt.

However, in case of inability to estimate the entire distribution, probability of distress shall be estimated for each
period and used as the expected cashflow:

Expected cash flowt = Cash flowt * (1 - Probability of distresst)

2. DCF Valuation + Distress Value: A DCF valuation values a business as a going concern. However, DCF valuations
will understate the value of the firm if there is a possibility that the firm will fail before it reaches stable growth, and
the assets will be sold for a value less than the present value of the expected cashflows (a distress sale value).
Thus, the value of Distressed firm i.e. CI can be computing by following under- mentioned steps:

23
 I. Value the business as a going concern by looking at the expected cashflows it will have if it follows the
path back to financial health.

II. Determine the probability of distress over the lifetime of the DCF analysis.

III. Estimate the distress sale value as a percentage of book value or as a percentage of DCF value of equity
estimated as a going concern.

Accordingly following formula can be used to calculate the value of equity of CI.

Value of Equity = DCF value of equity (1 - Probability of distress) + Distress sale value of equity (Probability of distress)
3. Adjusted Present Value Model: This approach is based on the logic of separating investment decision from
financing decision. Accordingly, first the value of CI is computed without debt (the unlevered firm) and then effect
of debt on firm value is adjusted in the same:
Firm Value = Unlevered Firm Value + (Tax Benefits of Debt - Expected Bankruptcy Cost from the Debt)

While the first part can be computed by discounting the free cashflows to the firm at the unlevered cost of equity
the second part reflects the present value of the expected tax benefits from the use of debt. The expected bankruptcy
cost can be estimated as the difference between the unlevered firm value and the distress sale value:

Expected Bankruptcy Costs = (Unlevered firm value - Distress Sale Value)* Probability of Distress

4. Relative Valuation: Relative Valuation multiples such as Revenue and EBITDA multiples are used more popular
measures to value distressed firms than healthy firms because multiples such as Price Earnings or Price to Book
Value etc. often cannot even be used for a distressed firm. Analysts who are aware of the possibility of distress
often consider them subjectively at the point when they compare the multiple for the firm they are analysing to the
industry average.

9. (a). As per section 35ABA, in respect of any capital expenditure incurred for acquiring any right to use spectrum for
telecommunication services at any time during any previous year and for which payment has actually been made
to obtain a right to use spectrum, there shall be allowed for each of the relevant previous years, a deduction equal
to the appropriate fraction of the amount of such expenditure.
Where a part of the spectrum is transferred in a previous year and the proceeds does not exceed the expenditure
incurred remaining unallowed, the unallowed expenditure would be amortized in the following manner:
(i) Subtract the proceeds of transfer from the expenditure remaining unallowed.

(ii) Divide the remainder by the number of relevant previous years that have not expired at the beginning of the
previous year during which the spectrum is transferred.
- Total expenditure incurred for acquiring the spectrum = Rs 1,000crores
- Number of relevant previous years = 20 years
- Deduction claimed till the previous year 2022-23 = Rs 1,000 crores / 20 years × 3 years = Rs 150 crores
- Expenditure remaining unallowed as on April 1, 2023 = Rs 1,000crores - Rs 150 crores = Rs 850 crores
- Proceeds from the transfer of a part of the spectrum = Rs 300 crores
- Number of unexpired relevant previous years as on April 1, 2023 = 17 years
Computation of deduction available under section 35ABA for the previous year 2023-24:

Expenditure remaining unallowed - Proceeds from transfer of part of spectrum = Rs 850 crores - Rs 300 crores
= Rs 550 crores

Deduction for the previous year 2023-24 = Rs 550 crores / 17 years = Rs 32.35 crores
Since the proceeds from the transfer of a part of the spectrum (Rs 300 crores) donot exceed the expenditure

24
 remaining unallowed (Rs 850 crores), no amount would be chargeable to tax as profits and gains of business
under section 35ABA in the P.Y. 2023-24.
Therefore, the deduction available to Connect XG under section 35ABA for the previous year 2023-24 is Rs
32.35 crores, and no amount is chargeable to tax.
(b) Where the whole or any part of the spectrum is transferred and the proceeds of the transfer exceed the amount of
the expenditure incurred remaining unallowed,the excess amount or expenditure allowed till date (i.e., difference
between expenditure incurred to obtain spectrum and the expenditure remain unallowed), whichever is less, shall
be chargeable to tax as profits and gains of business inthe previous year in which the spectrum has been
transferred.

Since the proceeds from the transfer of a part of the spectrum (Rs 900 crores) exceeds the expenditure remaining
unallowed (Rs 850 crores), the lower of Rs 50 crores or Rs 150 crores, being expenditure allowed till date
would be chargeable to tax as profits and gains of business under section 35ABA in the P.Y. 2023-24.

CASE STUDY 11
V-Cure Limited is a pharmaceutical company that has many divisions. One of its divisions (Division A) produces chemical vials
that can be used for storage of medicines. These chemical vials have both internal and external market. Division B is another
department of the same company, uses these vials to package some of the medicines it produces. Following is the information
regarding production at Division A:

Annual Capacity: 30,00,000 chemical vials.

Actual annual production: 25,00,000 chemical vials

Internal transfer to Division B (annual): 10,00,000 chemical vials per year. Annual External sales: 15,00,000 hemical vials per year.

Division A incurs a variable cost of production Rs900 per vial. The fixed cost of production of Division A is Rs40 crore per year.
Out of this, Rs15 crore per year on account of machinery and production infrastructure to be maintained for the internal sales to
Division B. This has been procured to produce vials exactly as per the specifications of Division B. As per the company’s
current procurement policy, since Division A is operating at less than full capacity, Division B has to purchase its entire
annual requirement from Division A. Division A charges Division B at full cost plus 1% mark up as its transfer price. This is in tune
with the company’s overall transfer pricing policy that is used for inter departmental transfers. Performance assessment of each
departmental manager gives emphasis on the overall financial performance of the department.

Sale price of medicines manufactured by VCure Limited follows total cost based plus mark up pricing method. VCure Limited
estimates the total production and total cost a few months before the start of the next financial year and determines the sale
price for each of its medicines soldin the market for that year.

Recently, the manager of Division B has received a proposal from an external vendor where chemical vials can be procured for
Rs1,050 per vial. The product specifications would be suitable for the requirements of Division B and hence they are comparable
with the customized production that Division A makes for Division B. The manager of Division B would like to purchase vials from
the external vendor.
VCure closes its books on March 31st of each year. The primary assets of Division A comprises of an equipment that is used to
make the chemical vials. VCure had purchased the equipment on April 1, 2020 for Rs6,00,00,000. Useful life of the equipment
is 10 years. On March 31st, 2023 the company classified this equipment as held for sale. The impairment testing provides an
estimated recoverable amount of Rs4,00,00,000. The fair value less cost to sell on March 31, 2023 was Rs3,50,00,000. On
March 31st, 2024 the management changed its plan to sell the equipment, so it no longer met the criteria as held for sale. The
recoverable amount as at March 31st, 2024 is Rs4,50,00,000.

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 You are the chief financial officer (CFO) at V-Cure Ltd. The sales team, comprising of Medical Representatives (MR) has been
given a target to grow the sales volume by 10% year on year. Pharmaceutical companies like V-Cure Ltd. operate under
Oligopolistic market conditions. These companies, including V-Cure Ltd. use sales promotion i.e. use of incentives to encourage
patronage like free samples, free trials, loyalty programs etc. as part of its marketing strategy. During the course of your service
at V-Cure Ltd., you come across certain financial and non financial inducements (kickbacks) given by few of the Medical
Representatives to doctors who prescribe a particular drug developed by the company. The MRs request the doctors to not to
reveal certain side effects of a drug that can lead to complications in certain cases. This is done to increase the sales volume of
the business, which is also used in the performance evaluation of the Medical Representatives for career promotions and
advancements.

V-Cure Ltd. has undertaken a core competency analysis to find out how it can improve its value chain. In the Oligopolistic conditions,
the company wants to follow product differentiation strategy.
I. Multiple Choice Questions
1. By following total cost based pricing plus mark up for products, what are the disadvantages of this policy for V-Cure Ltd.?
(1) Does not consider if the customer is willing to pay the price arrived at based on total cost
(2) Requires budgeting of production output volume to determine allocation of overheads, this may not always be
accurate
(3) Surplus generated from sales cannot completely cover the replacement cost of fixed assets in an inflationary
economic condition
(4) Pricing using this method is difficult to arrive at due to lack of information Options

(a) 1 and 2 (b) 1, 2 and 3 (c) 1, 3 and 4 (d) 2 and 3

2. With reference to the information provided in the case study about the Medical Representative (MR) team requesting
doctors not to reveal the side effects of a drug in order to boost sales, as a senior professional accountant in service, what
action will be appropriate in this situation?

(a) Ignore the information since it does not directly relate to your area of oversight as a management accountant.

(b) Ignore the information since you are not receiving the kickback personally and therefore you are not doing
anything unethical.

(c) The actions of the MR team affect public health which requires you as a senior professional accountant in service
to respond appropriately as per ICAI’s Code of Ethics.

(d) Ignore the information since the company does not follow its own Code of Ethics that it has drafted, hence there
is no obligation on you to do so.

3. Pharmaceutical companies like V-Cure Ltd. operate under Oligopolistic market conditions. Like its competitors, V-Cure
Ltd. follows non-price strategy to market its products over a pricing strategy because:

(a) Pricing information is not easily available as there are many players in the market

(b) A non-price strategy cannot be easily tracked by rivals and thereby gives the firm a competitive edge

(c) Pricing strategies lead to price wars which hurt long term profitability

(d) Following a non price strategy is more cost effective compared to pricing strategy
4. Division A and Division B of V Cure Limited operate under different managers who are assessed based on the financial
performance of their respective divisions. Which McKinsey 7S element does this most closely relate to?

(a) Strategy (b) Structure (c) Systems (d) Shared Values

5. V-Cure Ltd. has undertaken a core competency analysis to find out how it can improve its value chain. In the Oligopolistic
conditions, the company wants to follow product differentiation strategy. Which of the following parameters is not a

26
 test for core competency
(a) Cost advantage (b) Difficulty in imitation by competitors
(c) Relevance to the customer (d) Breadth of application in terms of the potential markets it can open up
6. As a management accountant, please analyze the scenario with respect to the inter department transfer from Division A
to Division B, for the following:
1. Calculate the internal transfer price based on full cost plus 1% mark up.
2. Discuss the pros and cons of the current transfer pricing methodology.
3. Should the management permit Division B to procure chemical vials from the external vendor?
7. Recommend the accounting treatment of the events for the year ending March 31, 2023 and March 31, 2024 and calculate
the value of the equipment at the end of 2023 and 2024.

ANSWERS TO THE CASE STUDY 11

1. (b) 1, 2 and 3

Reason: Statements 1, 2 and 3 are the disadvantages of total cost based pricing.

Statement 1 – Pricing based on total cost with an added mark-up may not always be helpful in generating demand. This
method does not take into account the potential customers’ preference to buy the product at the determined price.
Statement 2 – Overhead allocation is a cost used to arrive at the total cost for the product, it is allocated to each
produce based on the budgeted production volume. Hence, there may be under or over recovery of overhead if
the budgeted production is not accurate enough.
Statement 3 – Sale price is dependent on total cost, for which depreciation is calculated on historic prices of fixed
assets. In case the cost of fixed assets remains stable, then the surplus generated using such a sale price will
cover the replacement cost of the fixed asset at the end of its useful life. However, in inflationary economic
conditions, the cost of fixed assets increase. Hence, the surplus generated from the sale price based on historic
costs will not be sufficient to fund the replacement of the fixed asset at the end of its useful life.
Statement 4 – Total cost method is simple to follow with a defined set of steps. The company will have complete
information of its costs hence there is no lack of information.

2. (c) The actions of the MR team affect public health which requires you as a senior professional accountant in service to
respond appropriately as per ICAI’s Code of Ethics.

Reason: as per IESBA, actions that affect public safety and health would fall under NOCLAR under the Revised Code
of Ethics. Your response as a senior professional accountant in service, is outlined under Section 260 of NOCLAR.
3. (c) Pricing strategies lead to price wars which hurt long term profitability
Reason: because while determining the pricing for a product, each firm considers not just the demand for the
product but also the possible reactions of other firms to every change. A reduction in price by one firm is quickly
followed by the rivals. Hence, revenue keeps getting reduced and this price war can hurt profitability. In an
Oligopoly, given that there are only few firms, information is available to both the firm and its rivals, hence pricing
information as well as any move done by any of the firms gets noticed by the competitors.

4. (b) Structure.
Reason: It is the formal framework by which job tasks are divided, grouped, and coordinated. It is the formal
pattern of interactions and coordination designed by management to link the tasks of individuals and groups
towards achieving organizational goals.
5. (a) Cost advantage
Reason: Cost advantage is not a test of core competency since V-Cure Ltd. wants to follow product
differentiation strategy rather than cost leadership strategy.
27
6. (1) Calculation of transfer price at full cost plus 1%
Sr. No. Cost component Annual cost(Rs) Cost per vial(Rs)
1 Variable cost per vialAnnual Fixed cost 900.00
2 a) Special equipment for Division B
(Rs150,000,000/10,00,000) Note 1
15,00,00,000 150.00
b) Remaining fixed cost
(Rs250,000,000/25,00,000) 25,00,00,000 100.00
Total fixed cost 40,00,00,000 250.00
3 1,150.00
Total cost per vial (1 + 2)Mark up @1%
4 11.50
Total internal transfer price
5 1,161.50
Note 1: The fixed cost related to the cost of special equipment should be borne only by Division B.
They need to be spread over the number of units produced at Division B that is 10,00,000 per year.

The remaining fixed cost will be absorbed by the entire annual production that is 25,00,000 units per year,
production for both the internal and external market.

2. Pros and cons of full cost plus 1% internal transfer price policy.
The full cost plus 1% internal transfer price policy is a uniform policy followed throughout V-Cure Ltd.
Performance assessment of department managers is based partly on financial results.

Allowing for a 1 % mark up over full cost has the following advantages:
(a) Charging based on full cost allows the supplying division (Division A) to recoup its entire cost of production.

(b) The supplying division has an incentive to cater to internal sales since the 1% mark-up will reflect in the
profits earned by the department. Financial performance is considered during the performance assessment
of the manager of Division A. The mark-up on internal sales will also be perceived as a means of earning
profits that can bolster the department’s performance.

The problem with full cost plus mark-up costing are as follows:
The method allows the entire cost incurred by Division A to be absorbed by the total units produced by it. As per the
transfer pricing policy, Division A can recoup the entire cost it incurs plus earn a 1% mark up. Thus the financial
performance would always reflect a profit in the books of Division A. There is no incentive for Division A to attempt
to reduce any of its cost components, either variable or the fixed costs.
Division A is not producing at its full capacity, it is currently operating at 83% of its capacity (25,00,000 units of
actual production / 30,00,000 units total capacity). The total annual cost of production is Rs265 crores per year,
comprising of variable cost of Rs225 crores per year (25,00,000 units of vial produced per year * Rs 900per
vial) plus fixed cost of Rs40 crores per year.
Out of the fixed cost of Rs40 crores per year, cost specific to Division B is Rs15 crores per year absorbed by the
production of vials for Division B alone. The balance Rs25 crores per year of fixed cost is absorbed by all the vials
produced both internal and external sales. This component of Rs40 crore per year fixed costs (15.09% of total costs -
Rs40 crore / Rs265 crore) would partly include costs related to idle capacity, example depreciation of underutilized
machinery, rental for factory building that is not completely utilized, under-utilized storage space etc. However, this
cost is being passed on to both Division B and the external customers. Division A is not taking any steps to lower
the fixed costs since it is able to pass on the cost and earn a mark up on it too. Therefore, there will be no attempt by
Division A to keep the costs at the optimal level, that might be comparable to external market vendors of
similar vials. Thus, cost- competitiveness, which is an essential part of product pricing is lost.

28
 (3) Consideration of producing in-house versus outsourcing procurement of chemical vials for
Division B.
The external vendor is offering a similar vial at Rs1,050 while Division A is charging Rs1,161.50 per vial. The cost is
more by Rs111.50 per vial. Overall, for 10,00,000 vials per year, Division B pays Rs 11.15 crores extra just to have the
vials produced internally by Division A.
Keeping the long run business interest in mind, the management of V-Cure Ltd. should direct Division A to find
ways of optimizing its cost and make it cost competitive with the external market. If there is no expectation that
the idle capacity would utilized in the long run, Division A has to scale down its operationsto only that much
capacity that can be utilized optimally. The management of V- Cure Ltd. can even think of outsourcing the
procurement of vials to external vendors.
While re-evaluating the transfer price with respect to the external market price, the company should also adjust
the price for costs that are not typically incurred for internal sales. Adjustments may be required for a variety of
costs that may be incurred at a much lower price for internal sales, namely packing costs, storage and
transportation costs, administrative costs, practically no selling and distribution costs etc. Adjustment should also
be made to give effect to the estimate profit margin the external vendor earns from sale of the vial at Rs1,050
per vial. Given these adjustments, the transfer price should be made competitive as compared to the external
market price for a similar vial.
If Division A is able to achieve cost reduction and make it competitive as compared to the market, the management
may continue its current policy of internal procurement. Otherwise, in the long run, it will be better to outsource
procurement of chemical vials for Division B.
7. (a) Value of equipment immediately before the classification as held for sale as per Ind AS 16
and Ind AS 36 as on March 31st, 2023

Particulars Amount (Rs)

Purchase price of the equipment 6,00,00,000
Less: Accumulated depreciation (for 3years, March 31st ending 2021, 2022 & 2023) (1,80,00,000)
Less: Loss on fair valuation (Balancing figure) 20,00,000
Carrying amount on March 31, 2023 4,00,00,000
On the initial classification as held for sale on March 31, 2023, the value will be lower of:-
Carrying amount Rs 4,00,00,000
Fair value less cost to sell Rs 3,50,00,000.
Hence, on March 31st, 2023 the equipment classified as held for sale will be recorded at Rs3,50,00,000.
Impairment loss on initial classification as held for sale is hence Rs50,00,000.
Depreciation of Rs60,00,000 for the year and loss of Rs70,00,000 (Rs20,00,000 loss before reclassification of
equipment as held for sale + Rs50,00,000 impairment loss on initial classification as held for sale.)

(b) On March 31st, 2024 the equipment is reclassified as it is no longer considered as held for sale due to change of
plans by the management. The value of the equipment on March 31st, 2024 will be:

Sr. No. Particulars Amount (₹)

a Carrying amount immediately before classificationas held for sale on 4,00,00,000
March 31st, 2023
b Less: depreciation based on the balance 7 years of equipment life (57,14,286)
c Carrying amount had the asset not been classifiedas held for sale 3,42,85,714
Recoverable amount 4,50,00,000
The equipment will be valued at Rs3,42,85,714 as on March 31st, 2024. Adjustment to the carrying amount will be:
Carrying amount of equipment on March 31st, 2023 Rs3,50,00,000
Less: Carrying amount of equipment on March 31st, 2024 Rs3,42,85,714 Rs 7,14,286
Hence, the adjustment of Rs7,14,286 will be charged to profit and loss.

29
 CASE STUDY 12
MNO Ltd. is a renowned powerhouse in the FMCG sector, known for its wide range of household products and a robust distribution
network across urban centers. Despite its strong market position, MNO Ltd. has been facing challenges in penetrating rural
markets and diversifying its product portfolio to include healthier, sustainable options that are increasingly in demand.
PQR Ltd., on the other hand, is a rising star in the FMCG landscape, with a strong foothold in rural areas and an innovative line
of eco-friendly, organic products. PQR Ltd.'s unique approach to utilizing local resources and its sustainable supply chain has
earned it a loyal customer base and recognition for its green initiatives.
As consumer trends shift towards healthier and more sustainable products, MNO Ltd. recognizes the need to adapt its product
offerings and market approach. The leadership team at MNO Ltd., led by the visionary CEO, conducts a strategic review, and
identifies the acquisition of a company aligned with these emerging trends as a critical pivot for future growth.
MNO Ltd. embarks on a search for a suitable acquisition target, with PQR Ltd. quickly emerging as a frontrunner due to its
innovative product line and strong rural penetration. PQR Ltd.'s practices also align with MNO Ltd.'s long-term vision of
sustainability and social responsibility.
MNO Ltd decides to acquire PQR Ltd. by merger and the following data is available in respect of the companies:
MNO Ltd. PQR Ltd.
Number of equity shares 30,500 61,000
Market value per share 22 110
Earnings after tax 61,000 3,05,000

The summarised Balance Sheets of MNO Ltd. and PQR Ltd. immediately before the merger are as follows (the fair values of
assets and liabilities of both the companies are same as their carrying values):
Amount (Rs in thousands)
Particulars
MNO Ltd. PQR Ltd.
Current Assets 700 600
Non-Current Assets 1,100 3,000
Total Assets 1,800 3,700
Current Liabilities 495 200
Non - Current Liabilities 300 1,200
Total Liabilities 795 1,400
Equity
30,500 Shares of 10 Each 305 -
61,000 Shares of 10 Each - 610
Retained Earnings 700 1,690
Total Equity 1,005 2,300
Total Equity and Liability 1,800 3,700

MNO Ltd. has decided to acquire PQR Ltd. by acquiring its shares. MNO Ltd. prepared a scheme by which an offer was made to
the shareholders of PQR Ltd. The Offer was made on 1st March 2023. The offer remained open for four months. Such an offer
was approved by shareholders having 92% value of the shares. Subsequently MNO Ltd. gave notice to the remaining dissenting
shareholders that it desires to acquire their shares. Such notice was given on August 2023. Certain dissenting shareholders
made an application to the Tribunal that acquisition of their shares should not be permitted. However, their application was
dismissed by the Tribunal. Hence, MNO Ltd. acquired the balance shares of 8% of the dissenting shareholders.
While other minority shareholders have reconciled to the decision of the tribunal, Mr. A, a shareholder holding 5% of the shares
is furious. He believes that the growth prospects of PQR Ltd are far higher than MNO Ltd. He believes that the exchange ratio
should be calculated on the basis of market value alone. He also believes that forcible acquisition of shares is a violation of his
rights and amounts to oppression of minority shareholders. He feels that only he should be able to decide whether he should
30
 sell his shares. Accordingly, he wishes to approach the High Court against the decision of the Tribunal
Premerger, PQR Ltd. had a block of assets carrying 15% rate of depreciation, whose WDV as on 31.3.2023 after reducing
depreciation for P.Y. 2022-23 was 4 lakhs. It purchased another asset (second-hand plant and machinery) of the same block on
01.11.2023 for 1.44 lakhs and put to use on the same day. PQR Ltd. was merged with MNO Ltd. with effect from 01.01.2024.

Post merger, the directors of PQR Ltd. are appointed 5 out of 8 positions in the combined entity's board.

Despite the acquisition, it is decided that post-merger, both MNO Ltd. and PQR Ltd. will continue to operate as independent
divisions, namely – MNO division and PQR division in the merged company. This acquisition, followed by the decision to keep
both companies as independent units, is seen as a strategic move that combines the strengths of both entities while preserving
their unique values and operational strengths. MNO division benefits from an expanded product portfolio and entry into the growing
organic market segment, while PQR division gains from the extensive distribution network and market reach of MNO, setting a path
for mutual growth and market dominance in the FMCG sector.

The company shall have separate COOs for both the divisions, and it wishes to evaluate their performance. It was considering
computing ROI of both the divisions for this purpose. However one of the COOs pointed out that it may be possible that
divisional ROI can be increased by those actions that will reduce the overall ROI of the company, and conversely, the actions
that decrease divisional ROI may make the company as a whole better off. In other words, evaluating divisional managers on the
basis of ROI may not encourage goal congruence.
Accordingly, for better evaluation of performance, an alternate method of measuring performance using residual income is
proposed. Following are the details regarding the same: The overall cost of capital is 8%.

MNO Ltd. PQR Ltd.

Available Investment Project 25 lacs 15 lacs
Controllable Contribution 2.5 lacs 1 lac

I. Multiple Choice Questions

1. The EPS of both the companies pre-merger was:
(a) MNO Ltd. = Rs 5; PQR Ltd. = Rs 2 (b) MNO Ltd. = Rs 2; PQR Ltd. = Rs 5
(c) MNO Ltd. = Rs 1; PQR Ltd. = Rs 1 (d) MNO Ltd. = Rs 0.5; PQR Ltd. = Rs 0.2
2. PQR Ltd. wants to ensure the earnings to members are same as before the merger takes place. The exchange ratio to
satisfy this condition of PQR Ltd. shall be:
(a) 1 (b) 0.4 (c) 2.5 (d) 1.09

3. If the exchange ratio as decided in Question 2 is considered, the amount of goodwill comes out to be:
(a) Rs 3,37,000 (b) Rs 73,82,500 (c) Rs 9,58,000 (d) 60,87,500

4. In the above given case, the accounting acquirer and acquiree and legal acquirer and acquiree will be:
(a) MNO Ltd. – Accounting acquirer and Legal acquirer; PQR Ltd. – Accounting acquiree and Legal acquiree
(b) MNO Ltd. – Accounting acquirer and Legal acquiree; PQR Ltd. – Accounting acquiree and Legal acquirer
(c) MNO Ltd. – Accounting acquiree and Legal acquiree; PQR Ltd. – Accounting acquirer and Legal acquirer
(d) MNO Ltd. – Accounting acquiree and Legal acquirer; PQR Ltd. – Accounting acquirer and Legal acquiree
5. The COOs of both the divisions have proposed an alternate method of measuring performance using residual income. The
residual income of the divisions - MNO and PQR in the merged company will be:
(a) MNO division – Rs0.5; PQR division – (Rs0.2) (b) MNO division – Rs0.5; PQR division – Rs0.2
(b) MNO division – (Rs0.2); PQR division – Rs0.5 (d) MNO division – (Rs0.5); PQR division – Rs(0.2)
6. Mr. A has approached you for advice regarding his concerns. He wants to know whether such forced acquisition of shares in
tenable under the law. He further wants to know whether he is approaching the right forum to raise his concerns. Advise
him on the said matter.

31
7. You are required to compute the amount of depreciation allowable under the Income-tax Act, 1961 in respect of block of
assets carrying 15% rate of depreciation to MNO Ltd. & PQR Ltd. for the previous year ended on 31.03.2024.
8. Supposing the merger was carried out based on the exchange ratio suggested by Mr. A, illustrate the impact of the merger
on the EPS of both companies.
ANSWERS TO THE CASE STUDY 1 2
1. (b) MNO Ltd. = Rs 2; PQR Ltd. = Rs 5

Reason:
MNO Ltd. = 61,000/30,500 = Rs 2 PQR Ltd. = 3,05,000/61,000 = Rs 5
2. (c) 2.5
Reason: Calculation of exchange ratio to ensure shareholders of PQR Ltd. to earn the same as was before merger:
Shares to be exchanged based on EPS = (5/ 2) x 61,000 = 1,52,500 shares
To check
EPS after merger = (61,000 + 3,05,000)/30,500 + 1,52,500 = Rs 2
Total earnings in MNO Ltd. available to shareholders of PQR Ltd. = 1,52,500 x 2 = Rs 3,05,000

The EPS before merger of PQR Ltd is Rs 5, Thus, to ensure that Earning to members are same as before, the
ratio of exchange should be 2.5 share (Premerger EPS of PQR Ltd /Post Merger EPS of PQR Ltd )for 1 share.
3. (a) Rs 3,37,000
Reason: MNO Ltd. issues 2.5 shares in exchange for each share of PQR Ltd. All of PQR Ltd.'s shareholders
exchange their shares. Therefore, MNO Ltd. issues 1,52,500 shares in exchange for all 61,000 shares of PQR
Ltd. MNO Ltd. legally owns 100% of PQR Ltd.
The shareholders of PQR Ltd. own 83.33% (1,52,500/1,83,000) of the combined entity. The directors of PQR Ltd.
are appointed 6 out of 8 positions in combined entity's board. In accordance with Ind AS 103, PQR Ltd. (Legal
Acquiree) is the
accounting acquirer and MNO Ltd. (Legal Acquirer) is the accounting acquiree as PQR Ltd. shareholders control
over combined entity.
The market value per share price of PQR Ltd.'s share is Rs 110 per share and MNO Ltd. share price is Rs 22 per share.
If the business combination had taken place in the form of PQR Ltd. issuing additional shares to MNO Ltd.'s
shareholders in exchange for their shares in MNO Ltd., PQR Ltd. would have to issue 12,200 shares (30,500 / 2.5)
for the ratio of ownership interest in the combined entity tobe same. (12,200 / 73,200*). Therefore, the consideration
for the business combination effectively transferred by PQR Ltd. is Rs 13,42,000 (12,200 Shares x Rs 110).
Purchase Consideration transferred (by PQR Ltd.) Rs 13,42,000
Fair value of Assets less Liabilities Assumed (MNO Ltd.) (Rs 10,05,000)
Goodwill Rs 3,37,000
*12,200 + 61,000 = 73,200 shares
4. (d) MNO Ltd. – Accounting acquiree and Legal acquirer; PQR Ltd. – Accounting acquirer and Legal acquiree
Reason: MNO Ltd. legally owns 100% of PQR Ltd.. The shareholders of PQR Ltd. own 83.33% (1,52,500/1,83,000) of the
combined entity. In accordance with Ind AS 103, PQR Ltd. (Legal Acquiree) is the accounting acquirer and MNO Ltd. (Legal
Acquirer) is the accounting acquiree as PQR Ltd. shareholders control over combined entity.
5. (a) MNO Ltd. – Rs 0.5; PQR Ltd. – (Rs 0.2)
Reason:
MNO Ltd. PQR Ltd.
Available Investment Project 25 lacs 15 lacs
Controllable Contribution 2.5 lacs 1 lac
Overall Cost of Capital (8%) 2 1.2
32
 Residual income Rs 0.5 Rs (0.2)

6. In case of an amalgamation, it is possible for the transferee to acquire shares of the dissenting shareholders.
The basic requirements as to acquisition of shares mentioned in Section 235 of the Companies Act, 2013 are as follows:
 The scheme or contract involving the transfer of shares in a company (transferor company) to another company
(transferee company) has been approved by the holders of not less than 9/10th (90%) in value of the shares whose
transfer is involved.
 The approval of 9/10th shareholders in value shall be received within 4 months after making of an offer in that
behalf by the transferee company.
 The transferee company shall express his desire to acquire the remaining shares of dissenting shareholder in 2
months after the expiry of the said 4 months and shall give notice in the prescribed manner to any dissenting
shareholder that it desires to acquire his shares. The transferee company shall be entitled as well as bound to acquire
the shares of the dissenting shareholders where no application is made by any dissenting shareholders to the
tribunal in 1 month of receipt of notice of acquisition of shares or where an application is made by any dissenting
shareholder, but such application is dismissed by the Tribunal.
In the given case, since the application made by the dissenting shareholders has been dismissed by the Tribunal, MNO Ltd.
is bound to acquire all the shares of the dissenting shareholders i.e. an entire 8% shareholding. Since A Ltd acquired 5%
shareholding of the dissenting shareholders, this is valid as per Section 235 of the Companies Act, 2013. Hence, the
amalgamation of PQR Ltd. by MNO Ltd. is valid.
It is not recommended that Mr. A approach any forum regarding his grievances since the Tribunal has already evaluated the
merits and dismissed the application by the minority shareholders. However, if he still wishes to appeal against the order,
the NCLAT not the High Court would be appropriate forum for the same.

7. Statement showing computation of depreciation allowable

to MNO Ltd. & PQR Ltd. for A.Y. 2024-25

Particulars Rs
Opening WDV as on 1.4.2023 [i.e., WDV as on 31.3.2023 after reducing 4,00,000
depreciation for P.Y. 2022-23
Addition during the P.Y. 2023-24 (used for less than 180 days) 1,44,000
Total 5,44,000
Depreciation on Rs 4,00,000 @ 15% 60,000
Depreciation on Rs 1,44,000 @ 7.5% 10,800
Total depreciation for the P.Y. 2023-24 70,800
Apportionment between two companies:
PQR Ltd
60,000 x 275/366 45,082
10,800 x 61/152 4,334
49,416
MNO Ltd.
60,000 x 91/366 14,918
10,800 x 91/152 6,466
21,384

6. Supposing the merger was carried out based on the exchange ratio suggested by Mr. A, illustrate the impact of the merger
on the EPS and PE ratio of both companies.

MNO Ltd. PQR Ltd.

Number of equity shares 30,500 61,000
Market value per share 22 110
Earnings after tax 61,000 3,05,000
EPS 2 5
PE ratio 11 22

33
 Exchange ratio based on Market value per share:
Rs 110/ Rs 22= 5 or 5 shares of MNO Ltd. for 1 share of PQR Ltd. EPS after merger
No. of equity shares to be issued (61,000 x 5) 3,05,000
Existing equity shares outstanding 30,500
Equity shares outstanding after merger 3,35,500
Total profit (61,000 + 3,05,000) 3,66,000
EPS 1.09
Impact of merger on EPS of both the companies
MNO Ltd. PQR Ltd.
EPS after merger Rs 1.09 Rs 5.45*
EPS before merger Rs 2 Rs 5
(Rs 0.91) Rs 0.45
* Rs 1.09 x 5 = Rs 5.45

CASE STUDY 16
PurchaseOnn Inc. was founded in 1992 by Rose Lee as an online bookstore. It has undergone a remarkable transformation into
one of the world's leading technology companies. It was initially selling books only, PurchaseOnn expanded its offerings to include
music, movies, and a wide range of consumer goods like books, electronics, clothing, household goods and many more.

It launched [Link] in 1995 as an online bookstore, offering millions of titles for sale. It achieved significant sales
within the first month of operation, reaching customers across all 50 U.S. states and 45 countries worldwide. It earned
Revenue of $13.8 million in 1996, primarily from book sales in the U.S. PurchaseOnn, has continuously innovated and introduced
numerous new technologies to improve its operations, enhance customer experience, and expand its business. Now,
PurchaseOnn is very popular and often “the only marketplace” that people use.
Its diversification and innovations are done by expanding its product offerings beyond books to include music, movies, and
eventually a wide range of consumer goods. The company introduced Jinglee E-reader in 2007 and Milee voice assistant in
2017, pioneering new consumer technologies. It also ventured into cloud computing with PurchaseOnn Web Services (PWS) in 2007,
despite initial scepticism, leading to substantial revenue growth and profitability. The company successfully navigated and adapted
changes caused due to economic downturns such as the dot-com crash in 2001 and the recession in 2008-2009. Though it
maintained focus on long-term customer experience and innovation while streamlining costs and investing in key business areas like
PWS. Its strategic investments for future growth are expansion of PWS and advertising business - providing advertisement services
to other companies in the form of ads or sponsored products.
It undertook a comprehensive review of business initiatives to prioritize long-term revenue and profitability. Its recent strategy
shifts are towards Closure of physical store concepts to online webstore. It also emphasised on optimizing fulfilment center and
transportation network to meet surging demand during the pandemic.
Launch of PurchaseOnn business in 2016 catered to business procurement needs and drove $40 billion in annualized gross
sales. It also uses advertising to promote its products and services. This includes ads in online and offline media as well as social
media advertising.
It ventures into new frontiers by entry into healthcare with PurchaseOnn Pharmacy in 2021, followed by the acquisition of One
Medical in 2022 to revolutionize primary care and launch of Juiper Satellite internet project to provide affordable broadband
access to underserved areas, showcasing technological innovation and social impact. It has a focus on long-term innovation,
for this it made investment in Large Language Models and Generative AI to enhance customer experiences across all business
segments and democratization of Generative AI technology through PWS, enabling companies of all sizes to leverage
advanced machine learning capabilities. Its technology offers various functions and tools to make shopping easier for users, such
as personalized recommendations and search filter options. It also offers mobile apps that allow users to purchase products
through their smartphones and tablets.
34
[Link] diversified incomes are through various streams, including product sales, subscription services (Frame,
Jinglee Unlimited), advertising, and cloud computing services that provide stability and resilience against market fluctuations.
[Link]'s activities revolve around product sourcing, logistics, technology development, and customer service.
Investments in fulfilment centres, delivery infrastructure, owning warehouses, logistics centres and automation technologies have
enabled PurchaseOnn to streamline operations and offer faster, more reliable service to customers worldwide. The company offers a
range of delivery options, including standard shipping, express shipping, and same-day delivery depending on the customer’s location
and the product being purchased. It also offers delivery at a shipping address that may be different than the billing address; they
also offer contactless delivery, and the buyer is free to select the time frame within which delivery shall be attempted. It offers
goods/ services at lower prices in comparison to other company websites and traditional retailers due to lower costs for rent and
personnel. It also provides free delivery services and access to streaming services to the customers upgraded by becoming members
after paying subscription fees to “Buy with Frame” annually, quarterly or monthly. In addition to free delivery, it also encourages
customers to leave reviews and feedback on products and delivery services to improve its products and services. It also operates a
customer service that is available via email, phone, or live chat. Customers can contact customer service if they have questions or
problems, or if they need any assistance regarding PurchaseOnn products or services.
PurchaseOnn's resources include its extensive fulfilment network, proprietary technology platforms ([Link], PWS,
Millee), data analytics capabilities, and talented workforce. These resources serve as the foundation for PurchaseOnn's
competitive advantage and innovation-driven growth.
[Link] forged strategic partnerships with publishers, suppliers, third-party sellers, and technology providers to
expand its product catalogue, enhance its platform's functionality, and improve operational efficiency. They also entered
partnerships with courier service centres, freight forwarders and logistics centres that help it to ship products to customers. It also
entered venture with Online payment service providers such as PayPayer and credit card companies to enable customers to
conveniently and securely pay for their purchases.
Its expenses are related to fulfilment of technology development, marketing, and content acquisition. While investments in
infrastructure and technology initially resulted in operating losses, PurchaseOnn's scale and efficiency improvements have led
to profitability in its core e- commerce and cloud computing businesses.
[Link] policies prioritize personalized recommendations, responsive customer support, and hassle-free return
policies. Its data-driven approach enables the company to anticipate customer needs and deliver tailored experiences that
foster long-term loyalty and satisfaction.

[Link] operates a marketplace platform that allows third-party sellers to list and sell products on its website. It collects
fees from these sellers for services such as fulfillment, advertising, and referral commissions. It also uses email marketing to send
users personalized offers and recommendations and to inform them about new products and services. Revenue from third-party
seller services includes fees, commissions, and other charges associated with facilitating transactions on the platform.

Particulars Related with Indian Subsidiary

PurchaseOnn Inc. also owns online space for advertisement on internet and has agreed to sell such online advertising space to
Indian Subsidiary for an amount of Rs 5 crores per month (USD 5,99,000). Indian Subsidiary sells such advertising space to
its customers in India on its own account. The contractual arrangement for sale of such advertising space is between the
customer and Indian Subsidiary.

Recently, PurchaseOnn has injected Rs 1,000 crores into its Indian Subsidiary. This investment aligns with the projected growth
trajectory of India's e-commerce sector, anticipated to reach USD 200-230 billion by 2030, with a steady annual rise of 20-22
per cent. Earlier in February 2023, the US-based parent company allocated Rs 830 crore into its Indian entity.
On 1st April 2023, Indian Subsidiary purchased an office block (building) for Rs 50,00,000 and paid a non-refundable property
transfer tax and direct legal cost of Rs 2,50,000 and Rs 50,000 respectively while acquiring the building in Bangalore. During
2023, it redeveloped the buildinginto a two -story building. Expenditures on re-development were Rs 1,00,000 for Building plan
approval; Rs 10,00,000 construction costs (including Rs 60,000 refundable purchase taxes); and Rs 40,000 due to
abnormal wastage of material and labour. The re-development of the building was completed on 1st October 2023, the entity

35
 rents out Ground Floor of the building to its 100% subsidiary Rupee-Onn under an operating lease in return for rental payment.
The subsidiary uses the building as a retail outlet for its operations. The entity kept first floor for its own administration and
maintenance staff usage. Equal value can be attributed to each floor.
During the previous year, Indian Subsidiary has launched a new range of in – house products with its long experience in clothes
and accessories section. In order to promote its in - house brand products, PurchaseOnn distributed gift vouchers to 100 lucky
members worth Rs 5,000 each on 31st January,2024. This coupon can be redeemed against any purchases of in - house brand
products made in future on PurchaseOnn.
I. Multiple Choice Questions
1. Which of the following statements best describes PurchaseOnn's value proposition based on the provided information?
(a) PurchaseOnn's value proposition lies in its diverse revenue streams, including product sales, subscription services,
advertising, and cloud computing, providing stability against market fluctuations.
(b) PurchaseOnn's value proposition centers around its key activities, such as product sourcing, logistics, technology
development, and customer service, enabling streamlined operations and faster service delivery.
(c) PurchaseOnn's value proposition is built on its extensive fulfilment network, proprietary technology platforms, data
analytics capabilities, and talented workforce, serving as the foundation for competitive advantage and innovation-
driven growth.
(d) PurchaseOnn's value proposition focuses on prioritizing customer relationships through personalized
recommendations, responsive customer support, and hassle-free return policies, anticipating customer needs and
fostering long-term loyalty and satisfaction.
2. In the context of PurchaseOnn's evolution from an online bookstore to a global technology leader, which of the
following statements best illustrates the concept of business integration?
(a) PurchaseOnn's revenue diversification strategy, including expansion into cloud computing, healthcare, and satellite
internet, showcases its ability to adapt to changing market trends.
(b) PurchaseOnn's investment in fulfillment centers, delivery infrastructure, and automation technologies reflects its
commitment to streamlining operations and offering reliable service to customers worldwide.
(c) PurchaseOnn's emphasis on personalized recommendations, responsive customer support, and hassle-free return
policies demonstrates its dedication to prioritizing customer relationships and enhancing satisfaction.
(d) PurchaseOnn's expansion of PurchaseOnn Business in 2015, catering to business procurement needs, exemplifies
its efforts to diversify revenue streams and capture new market segments.
3. Select which of the statement is correct in connection with Supply of vouchers in hands of PurchaseOnn to its members
(a) Taxable supply of Rs. 5,00,000 liable to GST in the month of January.
(b) Taxable supply of Rs. 5,00,000 liable to GST in the month in which voucher is redeemed by its member.
(c) Discount offered to members on the purchases made in the month of January and no tax would be payable on
such voucher.
(d) Discount offered to member at the time of redemption of voucher and no tax is payable on such voucher
4. How does PurchaseOnn's practice of allowing customers to select their preferred delivery time frame contribute to its
strategic cost management?
(a) By reducing shipping costs (b) By optimizing warehouse utilization
(b) By minimizing inventory holding costs By increasing customer satisfaction and loyalty
5. Select the correct statement specifically in relation to sale of online advertisement space service provided by PurchaseOnn
Inc. to Indian Subsidiary:
(a) PurchaseOnn Inc. is providing online information and database access or retrieval service and is thus, required to register
in India under GST and discharge GST on forward charge basis.
(b) PurchaseOnn Inc. is providing online information and database access or retrieval service electronically and place of
supply in such case is the location of supplier which is outside taxable territory in present scenario. Therefore, no
GST is payable on such services.

36
 (c) PurchaseOnn Inc. is providing online information and database access or retrieval service and tax on the same is to be
paid by Indian Subsidiary on reverse charge basis.
(d) PurchaseOnn Inc. is providing online information and database access or retrieval service and tax on the same is to be
paid by Indian Subsidiary in capacity of an agent of PurchaseOnn Inc.
6. Given the context, IDENTIFY and APPLY the business strategic framework applicable to [Link] that effectively
manages its resources, aligns its activities with customer needs, generates value for both customers and stakeholders, and
positions the company for continued growth and success in the dynamic global marketplace.
7. DISCUSS how the Bangalore building will be shown in the consolidated financial statements of the Indian Subsidiary and
in its standalone financial statements accordingto the relevant Indian Accounting Standards (Ind AS).

ANSWERS TO THE CASE STUDY 16

1. (d) PurchaseOnn's value proposition focuses on prioritizing customer relationships through personalized
recommendations, responsive customer support, and hassle-free return policies, anticipating customer needs and
fostering long-term loyalty and satisfaction.
Reason: PurchaseOnn's value proposition is primarily centered around delivering exceptional customer experiences.
The company emphasizes personalized recommendations, responsive customer support, and hassle-free return
policies, all of which contribute to customer satisfaction and loyalty. PurchaseOnn's data- driven approach enables
it to anticipate customer needs and deliver tailored experiences, enhancing the overall value proposition for its
customers. This customer-centric approach is crucial for sustaining long-term relationships and driving repeat
business, ultimately contributing to PurchaseOnn's growth and success in the marketplace.
2. (a) PurchaseOnn's revenue diversification strategy, including expansion into cloud computing, healthcare, and satellite
internet, showcases its ability to adapt to changing market trends.
Reason: Business integration involves the coordination of processes, systems, and functions across various
departments or entities within an organization to achieve common goals. In the case of PurchaseOnn, its
evolution from an online bookstore to a global technology leader involves integrating diverse business segments
and activities to drive growth and innovation.
Option A best illustrates the concept of business integration as it highlights PurchaseOnn's strategy of diversifying
its revenue streams by expanding into new business segments such as cloud computing, healthcare, and satellite
internet. This expansion requires coordination across different departments and functions within the organization,
including research and development, marketing, and sales. By integrating these diverse business segments,
PurchaseOnn demonstrates its ability to adapt to changing market trends and capitalize on emerging
opportunities for growth and expansion.
3. (b) Taxable supply of Rs 5,00,000 liable to GST in the month in which voucher is redeemed by its member.
Reason: As the supply against which the coupon will be redeemed is not known on the date of the sale of the
coupon, the time of supply of the coupon will be the date on which the member redeems it against inhouse
product of PurchaseOnn.
4. (d) By increasing customer satisfaction and loyalty.
Reason: Allowing customers to select their preferred delivery time frame enhances their overall experience with
PurchaseOnn, fostering loyalty and repeat purchases, which in turn contributes to the company's strategic cost
management by maximizing customer lifetime value.
5. (c) PurchaseOnn Inc. is providing online information and database access or retrieval service and tax on the same is to be
paid by India subsidiary on reverse charge basis.
Reason: Sale of online advertisement space is covered under the purview of OIDAR services as per Section 2(17)
of the IGST Act, 2017. However, the service provider located outside India in case of OIDAR services is required to
get registered under GST and discharge tax in India under forward charge basis only if the services are
provided to non-registered online recipient.
In the present case, sale of advertisement space is made by PurchaseOnn Inc. to Indian Subsidiary on principal to
principal basis and Indian Subsidiary is a registered entity in India under GST. Hence, even if the services are in
the nature of OIDAR service, the GST on such services is to be paid by Indian Subsidiary under reverse
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 charge mechanism.
6. PurchaseOnn follows the Business Model Canvas framework to structure its operations and drive growth in various
business segments. It aligns with each component of the Business Model Canvas and followed a systematic approach to
create a successful business model, encompassing nine key steps:
CUSTOMER SEGMENTS
The key customer segments for PurchaseOnn are diverse and comprehensive.
Individual customers, the classic users of the platform, buy goods from the web-shop, benefiting from a wide range of products
in various categories, such as clothes, books, and electronic items. PurchaseOnn also serves small businesses, including
retailers, manufacturers, and wholesalers, that want to sell their products on the platform. Additionally, PurchaseOnn has
connections with publishers and media companies to sell content like books, magazines, and movies through its
platform.
By catering to these diverse segments, PurchaseOnn creates a versatile marketplace that meets the needs of individual
consumers, small businesses, large enterprises, and content providers.

KEY PARTNERS
Key partners for PurchaseOnn include suppliers and channel partners who play a crucial role in making the business
model work.
The most important partners of the brand are those who generate the first source of revenue i.e., Sellers (suppliers or
the major retail companies). Logistic partners, including various logistics companies, freight forwarders, courier service
centres, and fulfilment centres, ensure quick and reliable delivery of products to customers. Payment partners, such as
PayPayer and credit card companies, enable customers to conveniently and securely pay for their purchases.
Additionally, PurchaseOnn operates a cloud computing platform called PurchaseOnn Web Services (PWS), which
provides businesses with access to server capacity and other resources. PWS collaborates with various partners to
provide these essential resources. Furthermore, independent authors can publish their works through Direct Publishing,
allowing PurchaseOnn to offer a diverse range of content.
This collaboration enhances the overall service offering and reliability of the platform, ensuring a comprehensive and
efficient experience for all users.

KEY ACTIVITIES
Key activities describe the most important things to do in a business or to keep it running smoothly. PurchaseOnn focuses on
several key activities to ensure smooth operations and maintain its position in the market.
Firstly, the Sale of Products is fundamental, involving both its own products and third- party offerings. This requires not
only listing products on its online platform but also ensuring they reach customers efficiently. Therefore, Logistics and
Delivery are critical, with an extensive infrastructure that includes warehouses, fulfilment centres, and logistics centres,
supported by partnerships with freight forwarders and courier services to ensure quick and reliable delivery.
Marketing is another crucial activity, as
PurchaseOnn employs strategies to strengthen its brand, including advertising on its website and social media, providing
personalized recommendations, and encouraging customer reviews. Customer Service is essential, with support
available via email, phone, or live chat to assist customers with inquiries, problems, or help in using PurchaseOnn's
products or services. Additionally, Advanced Technology and IT infrastructure play a vital role in enhancing website
functionality, user experience, and optimizing delivery and logistics services.
These combined efforts are integral to keeping PurchaseOnn running smoothly and maintaining its competitive edge.

VALUE PROPOSITION
PurchaseOnn's value proposition is compelling, offering a range of benefits that set it apart from competitors and
attract customers to its platform.
Firstly, convenience plays a significant role, as customers can shop from the comfort oftheir homes using a computer,
tablet, or phone, with products delivered quickly and reliably. Moreover, PurchaseOnn boasts a vast selection of
products, spanning categories like books, electronics, clothing, and household goods, catering to diverse customer
preferences. Cost efficiency is another key advantage, as the company's online model allows for lower prices
compared to traditional retailers, supplemented by the benefits of Frame membership, which includes free shipping.
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Additionally, PurchaseOnn prioritizes fast delivery, offering various shipping options to accommodate different customer
needs, from standard to same-day delivery. Furthermore, the company's commitment to customer satisfaction is
evident through its responsive customer support and hassle-free return policies, strengthening its value proposition and
fostering long-term customer relationships.
In conclusion, PurchaseOnn's value proposition encompasses convenience, extensive product selection, cost efficiency,
fast delivery, and customer-centric policies. These factors collectively contribute to its appeal among customers,
distinguishing it as a preferred choice over competitors.
CHANNELS
PurchaseOnn utilizes various channels to deliver its products and services to customers effectively.
Firstly, it leverages its web-shop, providing users with a platform to purchase products and offering convenient features
like personalized recommendations and search filter options to enhance the shopping experience. Additionally,
PurchaseOnn extends its reach through mobile apps, enabling users to make purchases conveniently from their
smartphones and tablets. Moreover, partnerships play a significant role, as PurchaseOnn collaborates with other companies
to expand its product availability and distribution
network. These partnerships include agreements with retailers to sell PurchaseOnn's products in their stores and with
logistics companies to facilitate efficient product shipment to customers.
Collectively, these channels contribute to PurchaseOnn's comprehensive distribution strategy, ensuring broad reach.

CUSTOMER RELATIONSHIP
Customer Relationship Management is essential for PurchaseOnn to acquire, retain, and grow its customer base. The
company employs various strategies to enhance customer interactions and satisfaction. One such strategy is
personalizedrecommendations, where PurchaseOnn utilizes customer data to create tailored product suggestions for
each individual. These recommendations are prominently featured on the website and also sent to customers via email,
allowing them to discover new products that align with their preferences and interests. Additionally, PurchaseOnn
actively encourages customers to leave reviews and feedback on products they have purchased. These reviews not
only assist other customers in making informed purchasing decisions but also provide valuable insights for
PurchaseOnn to improve its products and services.
By prioritizing customer feedback and engagement, PurchaseOnn fosters stronger relationships with its customers,
leading to increased loyalty and long-term growth.
REVENUE STREAMS
PurchaseOnn's revenue streams are diverse, reflecting the various ways it generates income. The primary source of
revenue is the sale of products, including both its own offerings and third-party items. Additionally, PurchaseOnn
monetizes through advertising, featuring ads and sponsored products for other companies. The company also
provides various services, such as selling e-books and music, renting movies and TV shows, and offering access to
streaming services. Another significant revenue stream comes from the frame membership, which provides customers
with benefits like free shipping and exclusive access to streaming services, available through annual, quarterly, or monthly
subscriptions. Lastly, PurchaseOnn operates a cloud computing platform called PurchaseOnn Web Services (PWS), which
offers businesses server capacity and other resources on a pay-per-use basis.
These combined revenue streams ensure a steady and diverse income for PurchaseOnn, supporting its growth and market
dominance.

KEY RESOURCES
Key resources describe the most important assets indispensable to a business. PurchaseOnn relies on a broad range of
key resources crucial to its business model.
PurchaseOnn’s online platform, the central hub for selling products and providing services, also serves as the main
source of customer reviews and feedback. Customer data is another vital resource, as PurchaseOnn collects and
analyzes this data to offer personalized recommendations and advertising, thereby improving site offerings and usability.
Skilled software engineers/ staff are essential for creating and maintaining the online platform infrastructure.
The company's delivery and logistics infrastructure, which includes its own warehouses and logistics centers along
with partnerships with freight forwarders and courier services, ensures quick and reliable product delivery. The

39
 PurchaseOnn brand itself is also a key resource, representing trust and reliability to customers and partners alike.
Together, these key resources are fundamental to PurchaseOnn's operations and success.

COST STRUCTURE
The costs involved in operating PurchaseOnn's business encompass a wide range of expenses necessary to maintain its
platform and services. Key expenses include the development and maintenance of websites and apps, cloud services,
database management and information security. Significant marketing and advertising costs involve search engine
advertising, social media advertising, and ad placements in both print and online media. Additionally, costs related to
procurement, storage, packing, and shipping of goods, along with commissions paid to sellers and real estate
expenses, are crucial for the business.
Staff costs, including salaries, wages, employee training and development, and human resources management, along with
general and administrative costs covering office equipment and supplies, travel and lodging, insurance, taxes, and
other administrative activities, represent a portion of expenses.
Together, these costs ensure the smooth and efficient operation of PurchaseOnn's business activities, including
maintaining its physical spaces such as fulfilment centres, sortation centres, and delivery stations.
7. In accordance with Ind AS 16, all costs required to bring an asset to its present location and condition for its intended use
should be capitalised. Therefore, the initial purchase price of the building would be:
Particulars Amount (Rs )
Purchase amount 50,00,000
Non-refundable property tax 2,50,000
Direct legal cost 50,000
53,00,000
Expenditures on redevelopment:Building plan pproval 1,00,000
Construction costs (10,00,000 –60,000) 9,40,000
Total amount to be capitalised on 1st October 2023 63,40,000
Treatment of abnormal wastage and material and labour: As per Ind AS 16, the cost of abnormal amounts of wasted
material, labour, or other resources incurred in self- constructing an asset is not included in the cost of the asset. It will
be charged to Profit and Loss in the year it is incurred. Hence, abnormal wastage of Rs 40,000 will be expensed off in
Profit & Loss in the financial year 2023 -2024.
Accounting of property- Building
When the property is used as an administrative centre, it is not an investment property, rather it is an ‘owner occupied
property’. Hence, Ind AS 16 will be applicable.
When the property (land and/or buildings) is held to earn rentals or for capital appreciation (or both), it is an
Investment property. Ind AS 40 prescribes the cost model for accounting of such investment property.
Since equal value can be attributed to each floor, Ground Floor of the building will be considered as Investment Property
and accounted as per Ind AS 40 and First Floor would be considered as Property, Plant and Equipment and accounted
as per Ind AS 16.
Cost of each floor = Rs 63,40,000 / 2 = Rs 31,70,000
As on 1st October 2023, the carrying value of building vis -à-vis its classification would be as follows:
In Standalone Financial Statements: The Ground Floor of the building will be classified as investment property for Rs
31,70,000, as it is property held to earn rentals. While First Floor of the building will be classified as item of
property, plant and equipment for Rs 31,70,000.
In Consolidated Financial Statements: The consolidated financial statements present the parent and its subsidiary as a single
entity. The consolidated entity uses the building for the supply of goods. Therefore, the leased-out property to a subsidiary
does not qualify as investment property in the consolidated financial statements. Hence, the whole building will be classified
as an item of Property, Plant and Equipment for Rs 63,40,000.

40
 CASE STUDY 17
Maxplus Ltd, (herein referred as to the ‘company’) one of the most trusted gateways to medicines, incorporated in Delhi with an
aim to eliminate fake and ineffective medicines, and supply good quality medicines in India. According to WHO research, every 1
or 2 in 10 medicines are adulterated in low/medium income countries like India. Consequently, the company aspiresto bring
about a change in these statistics. To improve transparency in the functioning of the
pharmaceutical industry, the company has been successfully contributing to providing genuine and unadulterated medicines
since its incorporation. Also, as the market demands, a constant customer loyalty program is also introduced by the company,
where in on eligible purchases, the customers can avail cash discounts or can enjoy incentive points which can be converted
into required products like blood pressure testing apparatus, diabetes testing apparatus, medicated / scented floor cleaner etc.
Entire operation of the company can be broadly classified into two divisions – (a) Retail outlet Division, and (b) Agency
Division.

Retail outlet Division

Currently this chain of medical store, operates in 100 cities in India with 10 stores in each city. As per the accepted policy of the
company, it does not involve in franchise model and all the outlets are operated by the company directly. Also, as per its policy, it
does not operate its outlet from owned premises and all are in rented properties only which is under lease model. The stocks
and sales are accounted and managed through a customised and specialized software developed by the company 2 years ago,
which is inbuilt with various features like stock at a glance, outlet wise sales details, frequency of customer purchases etc., The
IS officer of the company is a certified professional and the customer data base is protected in all respects.
With regard to its outlets, the company through its legal wing, enters into 3 years lease agreements with landlords for
operating its stores in all the cities. As a part of vendor registration, the company captures all the details of landlords like PAN,
TDS deductibility, MSME registration status, details GSTN (if any), type of the building (whether commercial or residential building),
onus of payment of electricity payments, etc at the time of entering into lease agreements including the incorporation of
escalation clause for rental value. According to the vendor database maintained by the company, out of the total 100 Landlords,
only 50 Landlords are registered under GST law and raise GST invoices. 10 other landlords are registered under MSME Act. All
the lease contracts stipulate the lessor will perform maintenance of the leased area and receive consideration for that
maintenance service.
The company is capable of selecting similar places in different cities having similar lease rents. The company is also capable of
finalizing all the lease contracts with similar terms and conditions. The contract includes the following fixed monthly prices payable
at the end of every year for the lease and non–lease component: – (a) lease Rs 27,000, (b) maintenance Rs 3,000.

The company has the ability to forecast demand for its products with high accuracy and it has sufficient working capital
requirements that can help it stock up inventory. Demand is continuous throughout the year. Hence, its inventory turnover is high.
The profit margin earned from its sales are high and generate sufficient cash flow. The working capital needs of the company are
sufficiently met by internal reserves. All these factors can enable the company to sell its products on a large scale in anticipation of
demand. Inventory can be stocked up and sold when the demand for it arises.

Agency Division
The company is also the leading trader / dealer of an extensive array of Medical Equipments. Maxplus directs all its
activities to cater to the expectations of customers by providing them excellent quality products as per their gratifications. On the
basis of its strict quality principles, it has been able to serve its customers earnestly.
In the retail outlet division, the company regularly purchases different varieties of medicines through centralized procurement
system, and they are distributed to the outlets which are soldto customers. Unsold medicines are held as stock in hand.
However, it buys medical equipment only when the customer gives purchase order along with the product specifications. The
delivery of such medical equipment is directly done by the corporate office. During the financial year, Maxplus has imported CT
scan machine by air and provided this machine to a hospital governed by a charitable trust. The hospital is registered under
section 12AB of the Income Tax Act and involved in healthcare services.

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 Particulars US $
Price at exporter’s factory 8,500
Freight from factory of the exporter to load airport (airport in the country of exporter) 250
Loading and handling charges at the load airport 250
Freight from load airport to the airport of importation in India 4,500
Insurance charges 2,000
Though the aircraft arrived on 22.08.2023, the bill of entry for home consumption was presented on 20.08.2023. The Chief Tax
Officer (CTO) of the company is uncertain about the computation of Assessable value of the CT Scan Machine. He needs
clarity about the following issues –
1. Which rate of basic customs duty and exchange rate should be applied – Whether the rate prevailing on arrival of aircraft
or the rate prevailing on the date of presentation of bill of entry?

2. Which rate of exchange should be applied – Whether the exchange rate notified by CBIC or the exchange rate prescribed
by RBI?

Rate of basic customs duty on 20.08.2023 was 20%. On 21.08.2023, the newly elected Government unexpectedly reduced the
Rate of basic customs duty to 10%. He furnishes all the relevant details –

Particulars 20.08.2023 22.08.2023

Exchange rate notified by CBIC Rs 80 per US$ Rs 83 per US$
Exchange rate prescribed by RBI Rs 81 per US$ Rs 82 per US$
Integrated tax leviable u/s 3(7) of the Customs Tariff Act, 1975 18% 12%

For the import of the aforesaid machine, the company is liable to settle the exporter in 3 months. Hence, at the time of import of the
machine, the company has entered into forward contracts to hedge the foreign currency cash flows without considering the other
hedging alternatives like options contract & money market hedging opportunities prevailing at that time. The details of the rates
of exchange and other derivative products at the time of acquisition is provided hereunder –
Spot rates Rs 80.23 – Rs 80.98

Interest rate in India 10% p.a.

Interest rate in US 4% p.a.

Actual forward rates commensurate with theoretical forward rates. At the time of entering into forward contract, the bank
charges a margin of 0.5% on its buying and selling rate.
Call Option
Strike Price Rs 81.21 0.01218
Premium Rs 1.50 50 cents

Particulars of Well-Well Outlet

Well-Well Outlet is located in a town with many colleges and universities around it. The town has a substantial student
population, most of whom are health-conscious and regular buyers of health products. Business for this particular outlet has been
slow in recent years due to the advent of online pharmacies that offer convenience, discounts, and time-saving benefits.
However, the management continues to believe that students would still prefer the personal service, immediate availability, and
expert advice that only a physical pharmacy can offer. Accordingly, management have framed a plan to attract students by offering
discounts on health products.
The average time a student spends at the college or university is 4 years, which is the average duration of any course. For a
nominal one-time subscription fee, Well-Well plans to offer students discounts on health products for a period of 4 years. By
attracting more footfalls, Well- Well targets to cross-sell its wellness products and health supplements. This would help it sustain
a reasonable revenue each year.
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 Well-Well would attract attention to the plan by initially offering free health check-ups, wellness products, and gift vouchers. This one-
time initial expense, net of the one-time subscription fee collected, would cost Rs 5,000 per student. On subscription to the plan,
the purchases of each student are expected to be as follows:

Particulars Years 1 and 2 Years 3 and 4

Spend on health products per year Rs 2,000 Rs 1,500
Spend on wellness products per year Rs 4,000 Rs 3,000
Spend on health supplements per year Rs 2,250 Rs 750
Assumptions:
1. Only 50% of the subscribers are expected to visit the pharmacy in years 3 and 4.
2. Across all years, only 75% of the subscribers who visit the outlet are expected to buy wellness products.
3. Only 25% of the subscribers who visit are expected to buy health supplements in years 1 and 2, and 10% of them in
years 3 and 4.

Financial Reporting Considerations

As Maxplus Ltd. prepares its annual financial statements for the year ending 31st March, 2024, several critical issues have come to
light that require careful consideration and disclosure.
Firstly, during the financial statement preparation process, it discovered that a provision for constructive obligation for payment
of bonus to selected employees in the corporate office (material in amount) which was required to be recognized in the annual
financial statements for the year ended 31st March, 2022 was not recognized due to oversight of facts. The bonus was paid
during the financial year ended 31st March, 2023 and was recognized as an expense in the annual financial statements for
the said year.
Secondly, in November 2023, Company entered into a loan agreement with a bank. The loan is repayable in 6 equal annual
installments starting from November 2028. One of the loan covenants is that an amount equivalent to the loan amount should
be contributed by the promoters of the Company by 4th March, 2024, failing which the loan becomes payable on demand.

As on 4th March, 2024, the Company has not been able to get the promoter's contribution. On 5th March, 2024, the Company
approached the Bank and immediately obtained a grace period up to 30th June, 2024 to get the promoter's contribution. The
bank cannot demand immediate repayment during the grace period.

These developments highlight the importance of accurate financial reporting and proactive management of loan covenants to
maintain financial stability and compliance.
I. Multiple Choice Questions
1. As at 31st March, 2024, how should the Company classify the loan?
(a) The loan will be considered as a current liability (b) The loan will be considered as a non -current liability.
(c) The loan will be considered as a deferred tax liability. (d) The loan will be considered as provisions.

2. Assume that it may not be able to get the promoter's contribution by the due date, the Company approached the Bank in
January 2024 and got the compliance date extended up to 30th June, 2024 for getting promoter's contribution. Will the
loan classification as at 31st March, 2024 be different from 1 above?

(a) The loan will be considered as a current liability. (b) The loan will be considered as a non -current liability.
(c) The loan will be considered as a deferred tax liability. (d) The loan will be considered as provisions.
3. Which of the following is true?
i. Push model supply chain is suitable for the Retail Outlet Division.
ii. Pull model supply chain is suitable for the Agency Division.
iii. Risk of pull model supply chain is overstocking & locking of working capital in the inventory.
iv. High inventory turnover ratio implies working capital gets locked in the inventoryfor a longer period of time.
(a) i, ii, iv (b) i, ii, iii, iv (c) i, ii, iii (d) i, ii
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4. Why does Maxplus Ltd. not use the franchise model for its retail outlets?
(a) To avoid legal complications (b) To maintain direct control over operations
(c) Due to lack of knowledge from potential franchisees (d) Because of the high cost of franchise fees

5. During the F.Y. 2023–2024, if the cost of all other common inputs (other than lease rent) is Rs 200 crores and total sales
is Rs 300 Crores (60% attract 18% GST and balance are exempt supplies), the amount of eligible ITC attributed for
effecting taxable supplies by the company will be –
(a) 36 Crores (b) 36.108 Crores (c) 21.7944 Crores (d) 60 Crores
Note: Ignore ITC on Integrated tax leviable under section 3(7).
6. Compute the value of CT scan machine for the purpose of levying customs duty as well as the customs duty and tax
payable.
7. The company has 3 choices: (i) Forward cover (ii) Money market cover, and (iii) Currency option. Which of the alternatives is
preferable by the company? (Note: Compute INR required under different alternatives for buying 1 USD after 3 months
and also the INR/USD exchange rate value should be upto 4 decimal points)
8. For the year 2023-2024 you are required to analyse whether the situation relating to constructive obligation for payment
of bonus is an error requiring retrospective restatement of comparatives considering that the amount is material.

9. With reference to Well-Well Outlet, calculate the customer lifetime value per subscriber. Given that PVIFA of Rs 1 for 4 years
at 10% = 3.169 and PVIFA of Rs 1 for 2 years at 10% = 1.735.

ANSWERS TO THE CASE STUDY 17

1. (a) The loan will be considered as a current liability
Reason: Paragraph 75 of Ind AS 1, inter alia, provides that an entity classifies the liability as non-current if the lender
agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting
period, within which the entity can rectify the breach and during which the lender cannot demand immediate
repayment.
In the present case, following the default, grace period within which an entity can rectify the breach is less than
twelve months after the reporting period. Hence as on 31st March, 2022, the loan will be classified as current.
2. (b) The loan will be considered as a non -current liability
Reason: Ind AS 1 deals with classification of liability as current or non-current in case of breach of a loan covenant
and does not deal with the classification in case of expectation of breach. In this case, whether actual breach has
taken place or not is to be assessed on 30th June, 2024, i.e., after the reporting date. Consequently, in the
absence of actual breach of the loan covenant as on 31 st March, 2024, the loan will retain its classification as
non-current.
3. (d) i, ii
Reasons: Under Push Model stocks are produced on the basis of anticipated demand. Demand forecasting
can be done via a variety of sophisticated techniques, such as operations research or data mining.
Under Pull Model stocks are produced in response to actual demand. This new business model is less product-
centric and more directly focused on the individual consumer: a more marketing- oriented approach.
This statement that the Risk of pull model supply chain is overstocking & locking of working capital in the
inventory is incorrect as in pull model , stocks are produced in response to actual demand , thus the question of
overstocking doesn’t arise.
High inventory turnover ratio implies working capital doesn’t gets locked in the inventory for a longer period of
time as inventory is quickly converted into sales.
Thus, only i and ii statements are correct.
4. (b) To maintain direct control over operations
Reason: Maxplus Ltd. does not use the franchise model for its retail outlets primarily to maintain direct
control over operations.
By directly operating all its retail outlets, the company ensures that its high standards for quality and service are
consistently met across all locations.
44
5. (c) 21.7944 Crores
Reason: If common inputs, input services and capital goods are used for taxable as well as exempt supply, only
proportionate ITC attributable to the taxable supply is available. The common ITC is apportioned in the ratio of value
of taxable supply and exempt supply.
ITC on all other common inputs (other than Rent) = Rs 200 Crores × 18% = Rs 36 Crores
ITC on Rent = Rs 30,000 pm × 12 months × 50 Landlords × 18% = Rs 32.40 Lakhs Total ITC on all other
common inputs & Rent = Rs 36.324 Crores
Total ITC eligible on all other common inputs & Rent= Rs 36.324 Crores×60% = Rs 21.7944Crores

6. Computation of assessable value of the machine

Particulars Amount
Ex-factory price of the goods 8,500 US $
Freight from factory of the exporter to load airport (airport in the country of 250 US $
exporter)
Loading and handling charges at the load airport 250 US $
Freight from load airport to the airport of importation inIndia 4,500 US $

Total cost of transport, loading and handling charges associated with the 5,000 US $
delivery of the imported goods to the place of importation

Add: Cost of transport, loading, unloading and handling charges associated with 1,800 US $
the delivery of the imported goods to the place of importation (restricted
to 20% of FOB value) [Note 1]
Insurance (actual) 2,000 US $
CIF for customs purpose 12,300 US $
Value for customs purpose 12,300 US $
Exchange rate as per CBIC [Note 2] Rs 80 per US $
Amount (Rs)
Assessable value (Rs 80 x 12,300 US $) 9,84,000
Add: Basic customs duty @ 10% [Note 3] 98,400
Add: SWS @ 10% 9,840
Value for the purpose of levying integrated tax [Note 4] 10,92,240
Add: Integrated tax @ 12% 1,31,068.8
Total duty & tax payable (rounded off) 2,39,309
Notes:
(1) In the case of goods imported by air, the cost of transport, loading, unloading and handling charges associated with the
delivery of the imported goods to the place of importation shall not exceed 20% of the FOB value of the goods.
[Fifth proviso to rule 10(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR)].
FOB value in this case is the ex-factory price of the goods (8,500 US $) plus the cost of transport from factory to
load airport (250 US $) plus loading and handling charges at the load airport (250 US $) which is 9,000 US $.
(2) Rate of exchange determined by CBIC is to be considered [Clause (a) of the explanation to section 14 of the
Customs Act, 1962].
(3) Section 15 of the Customs Act, 1962 provides that rate of duty shall be the rate in force on the date of presentation
of bill of entry or the rate in force on the date of arrival of aircraft, whichever is later.
(4) Integrated tax is levied on the sum total of the assessable value of the imported goods and customs duties [Section
3(8) of the Customs Tariff Act, 1962]. SWS leviable on integrated tax have been exempted.

7. Alternative 1: Forward Contract

The company is required to buy USD for INR after 3 months. Hence, the relevant rate applicable for the company will be
45
 3 months ForwardAsk INR / USD. According to the interest rate parity theory, the relationship between forward rate and
spot rate can be explained as under –
3 months forwardask INR / USD = Spot ask INR / USD × 1+ 3monthsInterestRateinIndia
1+3 months Interest Rate in US
1.025
3 months forwardask INR / USD = Rs 80.98 × = Rs 82.1826
1.01

Since the bank charges 0.5% Margin, total INR required for buying 1 USD will be
Rs 82.5935 (Rs 82.1826 + 0.5%)

Alternative 2: Call Option Contract

Exercise Price Rs 81.21
Option Premium payable at the time of buying Option Rs 1.50
Interest for option premium for 3 months (Rs 1.50 × 10% × 3/12) Rs 0.0375
INR required for buying 1 USD Rs 82.7475
Or without interest Rs 82.7100

Alternative 3: Money Market Hedge

Action: USD payable in 3 months.
1. Invest now the Present value of 1 USD = 1/1.01 = USD 0.9901
2. Buy USD 0.9901 for INR = Rs 80.98 (1+ 0.5%) × USD 0.9901 = Rs 80.5792
3. Borrow Rs 80.5792 at 10% for 3 months
4. Repay along with Interest = Rs 82.5937
Summary of Alternatives for buying 1 USD after 3 months
Forward Options Money Market Hedge
INR payable per USD Rs 82.5909 Rs 82.7475 Rs 82.5937

Since the Cash outflow is lower in case of Forward Market Hedge, it is preferable.

8. As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement, presentation or disclosure
of elements of financial statements. Financial statements do not comply with Ind AS if they contain either material errors or
immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows. Potential current period errors discovered in that period are corrected before the financial
statements are approved for issue. However, material errors are sometimes not discovered until a subsequent period, and
these prior period errors are corrected in the comparative information presented in the financial statements for that
subsequent period.

As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the beginning of the preceding
period in addition to the minimum comparative financial statements if, inter alia, it makes a retrospective restatement of
items in its financial statements and the retrospective restatement has a material effect on the information in the
balance sheet at the beginning of the preceding period.

In the given case, expenses for the year ended 31 st March, 2022 and liabilities as at 31st March, 2022 were understated
because of non-recognition of bonus expense and related provision. Expenses for the year ended 31 st March, 2023, on the
other hand, were overstated to the same extent because of recognition of the aforesaid bonus as expense for the year.
To correct the above errors in the annual financial statements for the year ended 31st March, 2024, the entity should:
(a) restate the comparative amounts (i.e., those for the year ended 31st March, 2023) in the statement of profit and
loss; and
(b) present a third balance sheet as at the beginning of the preceding period (i.e., as at 1st April, 2022) wherein it should
recognise the provision for bonus and restate the retained earnings.

46
9. Customer lifetime value per subscriber can be found by calculating the present value of the revenue that is generated over
the period of 4 years. This netted out with the cost incurred to attract subscribers, would give the customer lifetime value
per subscriber.
Sr. Particulars Revenue (per PVIFA PV of Probability of Net
No. year) Revenue Usage Revenue
1 Net cost of attracting students (onetime 5,000
expense)
2 Net revenue from health products
Years 1-2 2,000 1.735 3,470 100% 3,470
Years 3-4 (refer note 1) 1,500 1.434 2,151 50% 1,076
3 Sale of wellness products
Years 1-2 4,000 1.735 6,940 75% 5,205
Years 3-4 (refer note 2) 3,000 1.434 4,302 37.5% 1,613
4 Sale of health supplements
Years 1-2 2,250 1.735 3,904 25% 976
Years (refer note 3) 750 1.434 1,076 5% 54
5 Total revenue (Steps2+3+4) 12,394
6 Net revenue from subscription plan 7,394
(steps 5- 1)

Notes :
1. PVIFA (10%, 4 years) = 3.169 and PVIFA (10%, 2 years) is 1.735. Therefore, PVIF for years 3 and 4 = PVIFA (10%,
4 years) - PVIFA (10%, 2 years) = 3.169 - 1.735 = 1.434.
2. Only 50% of the subscribers are expected to visit in years 3 and 4. Out of those only 75% are expected to buy
wellness products. Therefore, only 37.5% of the subscribers (75% of 50% subscribers who visit) are expected to
buy wellness products in years 3 and 4.
3. Only 50% of the subscribers are expected to attend in years 3 and 4. Out of those only 10% are expected to buy
health supplements. Therefore, only 5% of the subscribers (10% of 50% subscribers who visit) are expected to buy
health supplements in years 3 and 4.
Present value of total revenue generated over the four-year period by a customer is Rs12,393 while the corresponding
expense is Rs5,000. Therefore, the customer lifetime value per subscriber is Rs7,394. Well-Well has to multiply this
with the expected number of subscribers each year, to find out if this would be a profitable proposition.

CASE STUDY 18
India’s Smartphone market shipped 8 million smartphones in 2023 with a normal one percent growth year-on-year basis. Market
size was valued at USD 169.72 billion in 2023 and is expected to reach USD 341.40 billion by 2030 as per International Data
Corporation Report dated February 13,2024.
Soft Tech Limited (STL), an Indian company, started its operations three years ago to manufacture Smart Phones and provision
of IT-software services. The objective of the company was to catch the market-share of the growing smartphone industry.
The STL company has entered into contract with its sole-distributor MJ & Co. in North India to supply Smartphone and Software
license. The software may be substantially customised to add significant new functionality to enable the software to integrate with
smartphone applications used by the customers. The company also sells the smartphones and the software license separately
to other distributors in the country. Customers can also buy smartphones and software license separately from other vendors
in the country.
STL has entered into a one-year contract on 1st April of current financial year (FY) with Distributor MJ to deliver
Smartphones with customised software by offering discounted prices for certain volumes as given hereunder:
Price per Smartphone Cumulative sales volume (units)
Rs 10,000 1 – 2500
Rs 9,500 2501 – 5000
Rs 9,000 5001 and above
47
 Volume is determined based on sales during the FY. There are no minimum purchase requirements. STL has estimated that
total sales volume to distributor MJ for the current FY would be 4000 units based on its experience with similar contracts.
STL company has estimated that 8,500 units of Smartphones (including 4000 units to MJ Distributor) would be sold in current
FY with market share of 1%, and the average contribution of Rs 2000 per unit will be achieved. However, at end of current FY,
the STL company actually sold 10,000 units of Smartphones (including 4500 units to MJ Distributor) by achieving market share
of 1.25 %.
Recently, smartphone users have been experiencing issues with app crashes, which has become a significant concern for the
company. In response, the company is planning to enhance not only the operating system but also the touch screen of its
devices. By improving these aspects, the company aims to provide a more responsive and reliable user experience, potentially
reducing the frequency of app crashes.
The CFO of the STL company wishes to increase its market share to 2% in next five years. For this purpose, he wants to double
the production of smartphones for which additional funds are required. Bank is ready to finance for expansion of smartphone
operations of the company but maximum up to 60% of valuation of smartphone business. The CFO has been provided the
following information of the company by the Accounts Manager:
Particulars Rs in lakhs
Property, Plant and Equipment (PPE) employedWorking 300
capital 200
Equity 9% 200
Debt 300
Corporate tax rate Risk- 30 %
free rate of returnAsset 6%
beta of Industry 0.6
Market rate of return in the industry 10 %
NOPAT for current year 200
Sales revenue for current year 1000

The PPE is being depreciated at the rate of 20% p.a. on opening balances; the sale revenue and Net Operating Profit After Tax
(NOPAT) would grow at the rate of 20% p.a. for next 3 years. Sales revenue will be stable from 4th year onwards and incremental
capital expenditure will be offset by depreciation. Assets (PPE) and working capital turnover ratio shall remain constant all
over the years.
JB Ltd, Canada, holds 25% equity in STL company. Further JB Ltd has appointed 30% directors of STL company; has advanced
loan amounting to 25% of book value of total assets of STL Company of Rs 500 lakhs and has guaranteed 25% of total
borrowings (total debt Rs 300 lakhs) of STL company. During current financial year, STL company has sold 1000 units of
Smartphones @ Rs 7000 to JB Ltd. The total costs (direct and indirect) for these 1000 units transferred amounted to Rs 60,00,000.
However, STL company billed CD Ltd, India (unrelated to STL company) at the rate of Rs 9500 per unit of smartphone and
earned a gross profit of 50% on its costs. The transactions of STL company with JB Ltd and CD Ltd are comparable, subject to
following differences:
a) STL company derives technology support from JB Ltd but there is no such support fromCD Ltd. The value of technology
support is estimated at 12% of normal gross profit.
b) JB Ltd gives business in large volumes. STL company offered to JB Ltd a quantitydiscount valued at 8% of normal
gross profits.
c) For supply of smartphones to JB Ltd, STL company neither runs any risk nor incurs any marketing costs but in case of supply
to CD Ltd, STL company has to assume all the risk and costs associated with the marketing function are estimated at 10% of
the normal grossprofits.
d) STL company offered three-months credit to JB Ltd. The cost of providing such creditmay be valued at 2% p.m. of the
gross profits. No such credit was given to CD Ltd.
I. Multiple Choice Questions
1. Determine which of the following statements correctly explain the customer’s pains:
(a) App crash (b) Touch screen technology (c) The operating system (d) Slow screen-touch response
2. Using the Kano Model of product development and customer satisfaction, which feature does the touch screen/operating

48
 system fall under?
(a) Performance attribute (b) Indifferent qualities (c) Threshold attribute (d) Reverse qualities
3. STL company provides the customer with Software License that will be significantly customised and installed to make the
software function with the Smartphones bought by the customer from the company. STL company also sells Smartphone
and Software License separately in the open market. Determine whether the company has a single or multiple performance
obligations under the contract with customer in accordance with Ind AS 115, ‘Revenue from Contract with Customers’.
(a) The company has two separate performance obligations, one is for supply of Smartphone and second is supply of
Software License because they can be sold separately in the open market
(b) The company has two separate performance obligations, one is for supply of Smartphone and second is supply of
Software License because they are not inter- related
(c) The company has single performance obligation for smartphone and software license because license is
significantly customised to function with the smartphone
(a) The company has single performance obligation for smartphone and software license because they are sold
to same customer at same time
4. Determine the amount of Market Size Variance & Market Share for smartphones during current FY
(a) Market Size Variance - Rs 10 lakhs (A); Market Share Variance - Rs 40 lakhs (F)
(b) Market Size Variance - Rs 10 lakhs (F); Market Share Variance - Rs 40 lakhs (A)
(c) Market Size Variance - Rs 40 lakhs (A); Market Share Variance - Rs 10 lakhs (F)
(d) Market Size Variance - Rs 40 lakhs (F); Market Share Variance - Rs 10 lakhs (A)
5. Are STL Company and JB Ltd., Canada associated enterprises? If so, why?
(a) Yes, STL Company and JB Ltd, Canada are associated enterprises because JB Ltd., Canada holds substantial
equity interest of 25% in STL Company which is > 20% of equity of STL Company
(b) Yes, STL Company and JB Ltd, Canada are associated enterprises since JB Ltd, Canada has guaranteed 25% of total
borrowings of STL which is > 10% of total debt of STL Company
(c) Yes, STL Company and JB Ltd, Canada are associated enterprises since JB Ltd, Canada has advanced loan amounting
to 25% of book value of total assets of STL Company which is > 10% of book value of total assets of STL
(d) No, STL Company and JB Ltd, Canada are not associated enterprises
6. Soft Tech Ltd (STL) has actually sold 2000 units of Smartphones to Distributor MJ for the half year ending on 30th September
and has sold 4500 units of smartphones for the current FY ending on 31st March. Determine the transaction price and the
amount of revenue to be recognised by Soft Tech Ltd for the half-year ending on 30th September for the current year as
a whole ending and on 31st March in accordance with Ind AS 115. Necessary journal entries should be recorded in the books
of STL for the current FY.
7. Determine the amount of bank finance available for expansion of operations of smartphones in accordance with
proposal given by CFO of the company.
8. Compute the Arm’s Length Price as per section 92 of Income tax act, 1961, along with income to be increased for current
financial year of Soft Tech Ltd under the Cost Plus Method for the transactions entered into by the Soft Tech company with
JB Ltd, Canada.

ANSWERS TO THE CASE STUDY 18

1. (a) App crash
Reason: Customers are experiencing issues with app crashes, causing significant inconvenience and leading to
dissatisfaction among users.
2. (c) Threshold attribute
Reason: When these characteristics are met, they are taken for granted, but when they are not met, they cause
dissatisfaction. Customers expect these qualities and regard them as basic; it is unlikely that they will mention them

49
 to the company when asked about quality attributes.
3. (c) The company has single performance obligation for smartphone and software license because license is significantly
customised and integrated to function with the smartphone.
Reason: The customer cannot use the smartphone without integration of software license
4. (a) Market Size Variance - Rs 10 lakhs (A); Market Share Variance - Rs 40 lakhs (F)
Reason: Market Size Variance = [Actual Industry Sales Volume – Budgeted Industry Sales Volume] x Budgeted
Market Share % x Budgeted Average Contribution (Margin) p.u.
Actual Industry Sales Volume = 10000/1.25% = 8,00,000 units Budgeted Industry sales volume =
8500/1% = 8,50,000
Market Size variance = (8,00,000 – 8,50,000) x 1% x Rs 2000 = Rs 10 lakhs Adverse
Market Share Variance = [Actual Market Share % – Budgeted Market Share %] x Actual Industry Sales Volume
x Budgeted Average Contribution (Margin) p.u.
Market share variance = (1.25 % – 1% ) x 8,00,000 x Rs 2000 = Rs 40 lakhs Favourable
5. (b) Yes, STL Company and JB Ltd, Canada are associated enterprises since JB Ltd, Canada has guaranteed 25% of total
borrowings of STL which is > 10% of total debt of STL Company
Reason: As per section 92A one entity becomes associated enterprise of another entity in any of the following cases:
(i) If one entity holds ≥ 26% voting power of other entity
(ii) If one entity has advanced loan of 51% or more of book value of total assets of other entity
(iii) If one entity has appointed more than half of the board of Directors of other entity
(iv) If one entity has guaranteed 10% or more of total borrowings of other entity. In the given case, condition (iv)
is satisfied.
6. (a) Transaction price The transaction price is Rs 9500 per smartphone based on best estimate of total sales volume of
4000 units for the current FY to Distributor MJ
(b) Recognition of Revenue would be recognised at a selling price of Rs 9500 persmartphone sold.
For the half year ended on 30th September, STL company shall recognise revenue of Rs 190 lakhs (2000 units sold x Rs
9500), though they will charge Rs 10,000 per unit.
For the whole current FY, STL company shall recognise revenue on actual sales basis for Rs 427.50 lakhs
(4500 units x Rs 9500).
(c) Recognition of Liability For the half year ended on 30 th September: STL company shall also recognise a liability
(advance from customer) for excess price realised amounting to Rs 10 lakhs (2000 units x Rs 500).
The accounting entries in books of STL company for current FY
Date (Current FY) Particulars Dr (Rs) Cr (Rs)
30th Sept. Bank or Receivables A/c Dr. 200,00,000
To Sales Revenue A/c 190,00,000
To Advance from customers(liability) A/c 10,00,000
31st March Bank or Receivables A/c [Link] 327,50,000*
from customers (liability) A/c Dr. 10,00,000
To Sales Revenue A/c 427,50,000
* Balancing Figure
7. Computation of Bank Finance available for expansion of Operations of Smartphone as per Proposal of CFO

Calculation of Depreciation on assets (PPE) and Working Capital (Rs in lakhs)

Projected Years 0 1 2 3 4 and
onwards
Opening balance of PPE 300 360 432 518.40
Less: Depreciation @ 20% for current year (60) (72) (86.40) (103.68)
Balance 240 288 414.72
Add: Purchases during current year 120 144 172.80 103.68

50
 Closing balance of PPE at end of year 360 432 518.40 518.40
Sales 1000 1200 1440 1728 1728
Working capital (20% of Sales) 200 240 288 345.60 345.60
Calculation of Free Cash Flows from expansion of Operations of Smartphones(Rs in lakhs)
Particulars Year 1 Year 2 Year 3 Terminal year
NOPAT 240 288 345.60 345.60
Add: Depreciation 60 72 86.40 -
Less: Increase in PPE (120) (144) (172.80) -
Less: Increase in working capital (40) (48) (57.60) -
Free cash flows for firm (FCFF) 140 168 201.60 345.60

Calculation of Weighted Average Cost of Capital (WACC) for Smartphone Operations of Soft Tech Ltd
Equity Beta (βe) = Asset beta (1 + Debt-equity ratio after tax)
βa x [ 1 + D/E (1 – t)] = 0.6 [ 1 + 1.5 (0.7) ] = 1.23
Cost of Equity (Ke) = Rf + βe (Rm – Rf) = 6% + 1.23 (10% - 6%) = 10.92 %
Cost of debt after tax (Kd) = 9 % x (1 – 30%) = 6.3 %
WACC (Ko) = Kd. Wd + Ke. We = 6.3 (0.6) + 10.92 (0.4) = 8.148 %

Calculation of Total Valuation of Operations of Smartphone of Soft Tech Ltd

Years FCF (Rs in lakhs) PVF @ 8.148 % PV of FCF (Rs in lakhs)
1 140 0.925 129.50
2 168 0.855 143.64
3 201.6 0.791 159.466
Terminal 345.60/ 8.148 % = 4241.53 0.791 3355.05
Total 3787.656 or 3788
Maximum bank finance available for expansion of operations of smartphone = 60% of Rs 3788 lakhs = Rs 2273 lakhs or
60% of Rs 3787.656 lakhs = Rs 2272.594 lakhs.
8. Soft Tech Ltd (STL), an Indian company and JB Ltd, a Canadian company, are deemed to be Associated Enterprises u/s
92A of Income tax Act, 1961. The transaction of supply of smartphones by STL to JB Ltd, Canada, is an international
transaction u/s 92B and, therefore, transfer pricing provisions would be attracted in this case. The arm’s length price under
cost plus method shall be computed as follows:
Particulars GP ratio
Gross profit mark-up on cost in case of CD Ltd (an unrelated party) 50 %
Less: Adjustments for functional and other differences
Value of technology support [JB Ltd. provides technology support, but CD Ltd. does not provide such support. (6%)
Therefore, value of but CD Ltd. does not provide such support. Therefore, value of profit)
Quantity discount to JB Ltd. [Quantity discount is allowed to JB Ltd. as it gives business in large volumes, but the (4%)
same is not provided to CD Ltd. Therefore, it shall be adjusted] [8% of 50%, being gross profit]
Risk and cost associated with marketing [STL Ltd. has to bear all the risk and costs associated with the marketing (5%)
function in caseof CD Ltd., while there is no such risk in case of services to JB Ltd. Therefore, market risk and
cost shall be adjusted] [10% of 50%,being gross profit]
35%
Add: Cost of credit to JB Ltd. [STL Ltd has provided credit of 3 monthsto JB Ltd. but not to the unrelated party. 3%
Therefore, adjustment for the cost of such credit has to be carried out to arrive at the ALP](2% of
50% x 3 months)
Arm’s length gross profit mark up to cost 38 %
Cost incurred by STL for supply to JB Ltd 60,00,000
Add: Adjusted gross profit (Rs 60,00,000 x 38%) 22,80,000
Arm’s length billed value 82,80,000
Less: Actual billed income from JB Ltd (Rs 7000 x 1000 units) 70,00,000
Increase in income of STL 12,80,000
51
 CASE STUDY 21
Cycles India Ltd. (CIL) manufactures cycles for both adults and children. Given below is information about cycles made for
children–

Particulars Traditional Activity Based

CVP Analysis CVP Analysis
Monthly Demand and Production 20,000 20,000
Selling Price 16,000 16,000
Variable Cost per unit 15,000 15,000
Fixed Cost p.m. (as identified under each cost system) 20,00,000 16,00,000
Number of set ups 800
Cost per set up 500

Fixed costs of Rs 20,00,000 per month under Traditional CVP analysis are those that do not vary with respect to volume.
Following an Activity Based Costing study, fixed cost that do not vary as per volume or any other cost driver has been
identified to be Rs 16,00,000 per month. The study revealed a milling machine is used to cut metal into steer support. Production
of these steer support takes place in batches of 25 units.

Once a batch for children’s cycle is finished, the next batch would be that for adult cycles. Therefore, after each batch there
would be a set-up change. If 20,000 children’s cycles have to be produced, number of set-ups required = 20,000 steer support /
25 per batch = 800 set-ups. Each set-up costs Rs 500, comprising of material costs like change of oil, jig etc. This cost was
previously pooled together with fixed cost under traditional CVP analysis.

The plant manager would like to keep the number of set-ups minimum since they reduce the capacity of the machine. Suppose
that at any time the milling machine can be used to produce batches of either adult cycle or children cycles. He proposes to
increase the batch size of children’s steer support to 100 units in one batch. The number of set-ups will reduce from 800 (20,000
units / 25 units) to 200 (20,000 units / 100 units). Due to larger batch production, additional inventory storage area that would be
required to store that will cost the company Rs 100,000 per month extra.

The annual manufacturing capacity at CIL is currently 10,00,000 cycles. The demand for cycles has been increasing within India.
Hence, the management wants to increase the annual
manufacturing capacity to 18,00,000 cycles. Due to increased production requirements, CIL bought additional machinery for the
production line. All assets were purchased by account payee cheque. Below are the details of the plant and machinery
Sr. No. Particulars Rs
1 Opening WDV for plant and machinery on 1.4.2023 10,00,00,000
(WDV as on 31.3.2023 after reducing depreciation for PY 2022-23
2 New plant and machinery purchased and put to use on 30.6.2023 5,00,00,000
3 New plant and machinery purchased and put to use on 31.12.2023 5,00,00,000

Due to increased production requirements, the need for storage space both for raw materials and finished goods has increased
manifold. Storage costs at CIL’s factory site that manufactures cycles is very expensive. Hence, the management wants to consider the
option of implementing an effective Just In Time (JIT) system for material procurement and production in order to reduce on the need
for additional storage area. Under JIT, the materials will be delivered directly to the machine on the shop floor. Also, JIT being a pull
system initiated by the customer, once the cycle is manufactured it will be send out for delivery to the customer immediately. During
the meeting, as the management accountant, you point out that the JIT system needs to besufficiently supported by an effective
back-flushing system that will account for the components / materials used in the production process. Given the large production
volumes and fast turnaround times required under JIY, back-flushing system is the ideal solution to account for components.
CIL has recently decided to start selling cycles to professional cyclists within India. International exposure and increased availability of
facilities has improved career prospects for professional cyclists. Yet, at present this market segment is at its nascent stage. The
company is also foraying into this segment for the first time. CIL has opened a small dealership shop in Mumbai specifically to sell
these high value professional cycles.
52
 On March 31, 2024 it imported its first batch of 100 professional cycles from a company in France. The details of expenses
incurred at the dealership in Mumbai are given below:
Sr. No. Details Amount (Rs )
1 Cost of purchases (based on supplier’s invoice) 50,00,000
2 Handling costs relating to imports 6,00,000
3 Salaries of accounting staff at the dealership 5,00,000
4 Sales commission paid to sales agents 8,00,000
5 After sales warranty costs 4,00,000
6 Import duties 2,50,000
7 Freight expenses 2,50,000
8 Insurance of purchases 1,00,000
9 Brokerage commission paid to indenting agents 1,00,000

These 100 professional cycles are held in stock as on March 31,2024 which is the end of the financial year. The current market
price for these cycles is Rs64,000 per unit. CIL also has a firm sales contract with a smaller cycle dealership for 30 cycles at
Rs65,000 per unit, which cannot be settled yet. Estimated incremental selling cost is Rs2,000 per unit for all cycles.

The manager of the dealership for imported cycles is of the opinion that at a selling price of Rs64,000 per imported professional
cycle, CIL will be unable to earn any profit margin at all. The same is true even with the firm order to 30 cycles for which the sale
price is Rs65,000 per cycle. She wishes to increase the selling price to Rs85,000 per cycle. Her annual performance is based on the
profits that this dealership venture generates. Hence, she is very insistent on increasingthe selling price of the imported cycles.
I. Multiple Choice Questions
1. Given the information about CIL’s plant and machinery, the total amount of depreciation that can be claimed as per Income-
tax Act, 1961 for the A.Y. 2024-25. The company does not opt for Section 115BAA/115BAB.
(a) 2,62,50,000 (b) 4,12,50,000 (c) 3,00,00,000 (d) 3,75,00,000
2. Determine in which of the following cases should labour cost not be factored into the cost of set up?
(a) Cost of using temporary labour hired for particular set up
(b) Cost of outsourcing set up activities.
(c) Cost of using permanent labour who are otherwise idle
(d) If additional labour supplies are unavailable in the short term and where no further overtime working is possible, cost of
using permanent labour who are engaged in the production process.
3. Which of the following is not a pre requisite for an effective JIT system?
(a) Varying demand pattern (b) Lesser set up time (c) Total quality management (d) Multi skilled labour force
4. Which of the following is not a problem of using back-flushing in JIT system?
(a) The production reporting has to be accurate
(b) The scrap reporting has to be accurate
(c) Unless the software allows picking and back-flushing systems to co-exists, lot tracing is not possible
(d) Back-flushing requires no data entry of any kind until a finished product is completed.
5. Which of the following factors will make the customer more sensitive towards the price of the professional imported cycle?
(a) Higher perceived quality of the cycle
(b) Practical difficulty in comparison of the imported professional cycle with any alternatives available domestically due
to lack of awareness
(c) Imported professional cycles being unique can give users recognition among peers
(d) High proportion of expenditure (product cost) to the customer income
6. (i) Find the break-even point per month and profit per month under the traditional CVP method and the Activity Based
CVP method when the batch size of manufacturing children’s steer support is 25 units per batch.

53
 (ii) Analyse the impact on BEP (units per month) and profits per month when the batch size of manufacturing children’s
steer support increases from 25 units to 100 units per batch.
(iii) Explain How can the number of set-ups and cost of each set-up impact flexibility of the milling machine?
7. Evaluate which of the costs pertaining to the 100 imported cycles are allowed to be included in the cost of inventory in
the books of CIL.
(ii) Calculate the Net Realizable Value (NRV) of the inventory of CIL relating to these 100 imported cycles?
(iii) Calculate the value of inventory of the 100 imported cycles as of March 31, 2024.
ANSWERS TO THE CASE STUDY 21
1. (b) Rs 4,12,50,000
Reason: Working of depreciation for A.Y. 2024-25
Sr. No. Particulars Rs
1 Normal depreciation
(a) 15% x Rs 15 crores (Opening WDV of plant and 2,25,00,000
machineryof Rs 10 crores + new machinery acquired and put to use
on 30.6.2023 i.e., more than 180 days of Rs 5 crores)
(b) 15% x 50%x Rs 5 crores 37,50,000
(Since new machinery of Rs 5 crores acquired and put to use on
31.12.2023 i.e., less than 180 days, depreciation would be
restricted to 50% of 15%)
2,62,50,000
2 Additional depreciation
(a) 20% x Rs 5 crores 1,00,00,000
(Machinery acquired and put to use on30.6.2023 i.e., more than
180 days)
(b) 20% x 50% x Rs 5 crores 50,00,000
(Since new machinery of Rs 5 crores acquired and put to use on
31.12.2023 i.e., less than 180 days, additional depreciation would be
restricted to 50% of 20%)
1,50,00,000
3 Total depreciation for A.Y. 2024-25 4,12,50,000
Note: As per the third provisio of section 32(1)(ii), the balance additional depreciation being Rs 50,00,000
(50% x 20% x Rs 5 crores) would be allowed as deduction in A.Y. 2025-26 provided CIL does not opt for the
provisions of section 115BBA.
2. (c) Cost of using permanent labour who are otherwise idle
Reason: The cost of permanent labour used for set-up, who are otherwise idle, would not be included in set-up
costs since the salaries paid to them have to be incurred anyway, it is a sunk cost.
The cost of temporary labour hired for particular set-up or cost of outsourcing of set-up activities would be included
in set-up costs as these are expenses incurred for the purpose of set up.
Where permanent labour is used for set-up, who are otherwise fully engaged in the production process and
additional labour supplies are unavailable in the short term, and where no further overtime working is possible, the
opportunity cost of labour (for example lost contribution) needs to be considered along with the hourly labour rate.
3. (a) Varying demand patterns
Reason: varying demand patterns are not helpful in JIT systems, the demand should be predictable since the
company operates without inventory.
Lesser set up time that makes batch production economical. Total quality management that enables quick
elimination of defects. Multi skilled labour force can perform different activities including repairs and maintenance,
which reduces idle time.
4. (d) Back-flushing requires no data entry of any kind until a finished product is completed.
Reason: This is actually an advantage of using back-flushing in JIT environment.
54
5. (d) High proportion of expenditure (product cost) to the customer income.
Reason: Where the expenditure on account of the purchasing the product is high in proportion to the customer
income, the customer will be more sensitive towards the price of a product.
6. (i) (a) Break-even point (units per month) and profit per month under traditional CVP analysis:
Amount (Rs )
Selling Price per unit 16,000
Variable Cost per unit 15,000
Contribution per unit 1,000
Fixed Cost per month 20,00,000
Break-even Point (per month in units) 2000
Monthly Demand (units) 20,000
Profit per month = {Monthly demand (units) ×Contribution per unit} – Fixed Cost p.m) 1,80,00,000
(b) Break-even point (units per month) and profit per month under Activity Based CVP method. The number of units
produced per batch is 25. Therefore, the number of set-ups will be 20,000 units / 25 units = 800 per month.

Amount (Rs )
Selling Price per unit 16,000
Variable Cost per unit 15,000
Contribution per unit 1,000
Fixed Cost per month (per Activity Based method) 16,00,000
Break-even Point (per month in units) 2,000
= {Fixed Cost p.m. + (number of set-ups × cost per set-up)}/Contribution p.u.
= {Rs 16,00,000 + (800 × Rs 500 per set-up)}/ Rs 1,000 per unit
= Rs 20,00,000 / Rs 1,000 per unit
Monthly Demand (units) 20,000
Profit per month = {Monthly demand (units) × Contribution per unit} – (Fixed Cost per month
+ Set-up cost per month) =(20,000 × Rs 1,000 per unit) – (Rs 16,00,000+Rs 400,000) =
Rs 2,00,00,000 – Rs 20,00,000 1,80,00,000
Although the BEP units and the profit per month are the same under both methods, the Activity Based method has brought forth
the point that there are 800 set-ups being performed per month. This would give the management more information to work
with in order to improve operations
(ii) Break-even point (units per month) and profit per month under Activity Based CVP analysis: Batch size increased from
25 to 100 units; monthly set-ups reduce from 800 to 200 per month.

Amount (Rs)
Selling Price per unit 16,000
Variable Cost per unit 15,000
Contribution per unit 1,000
Fixed Cost per month (per Activity Based method) 17,00,000
Break-even Point (per month in units) 1,800
= {Fixed Cost p.m. + (number of set-ups × cost per set-up)}/Contribution p.u.
= {Rs 17,00,000 + (200 × Rs 500 per set-up)}/ Rs 1,000 per unit
= Rs 18,00,000 / Rs 1,000 per unit
Monthly Demand (units) 20,000
Profit per month = {Monthly demand (units) × Contribution per unit} 1,82,00,000
– (Fixed Cost per month + Set-up cost per month) = (20,000 × Rs
1,000 per unit) – (Rs 17,00,000+Rs 100,000) = Rs 2,00,00,000 – Rs 18,00,000

Analysis
It can be concluded by increasing the batch-size, the capacity of the machine can be increased. The time freed by reducing set-ups
55
 from 800 per month to 200 per month can now be used for other productin activities. Since the number of set-ups will be reduced, so
will the monthly set-up costs. Even after off-setting the increase in storage cost, profits will increase by Rs 200,000 per month
(Rs 1,80,00,000 - Rs 1,82,00,000 per month). Consequently, the break-even point has reduced from 2,000 units per month to
1,800 units per month. This reduction is due to the savings in the overall set-up costs due to the lower number of set-ups.
Set-ups reduce the production utility of a machine. A lower number of set-ups or lower set-up time can improve the utilization of the
machine. This also gives the company flexibility to keep changing the batches produced at the milling machineto cater to children’s
cycles and adult cycles as per its requirement. The other factor that impacts flexibility of production would be the set-up costs.
The lower the set-up costs, the higher the flexibility to change batches produced at the milling machine to cater to each type of
cycle.
7. (i) As per Ind AS 2, the following costs pertaining to the 100 imported cycles areincludable in the cost of
inventory of books of CIL:

Details Amount (Rs )

Cost of purchases (based on supplier’s invoice) 50,00,000
Handling costs relating to imports 6,00,000
Import duties 2,50,000
Freight expenses 2,50,000
Insurance of purchases 1,00,000
Brokerage commission paid to indenting agents 1,00,000
Total cost to be included in inventory 63,00,000
Hence, the total cost includable in the cost of inventory of the 100 imported cycles is Rs 63,00,000. Per unit cost would
therefore be Rs 63,000 per cycle.

Salaries of accounts department, sales commission, and after sale warranty costs are not considered to be the cost of
inventory. Therefore, they are not allowed by Ind AS 2 for inclusion in cost of inventory and are expensed off in the profit and
loss account.
(ii) Calculation of NRV of the inventory of CIL relating to these 100 imported cycles

While performing the NRV test, the NRV of 30 cycles to be sold to the other cycle dealership under a firm contract will be
Rs 63,000 per cycle (Selling price per cycle Rs65,000 per cycle less additional selling expenses Rs 2,000 per
cycle). The cost of inventory per cycle as calculated in (i) above is also Rs 63,000 per cycle. Therefore, no adjustment
is required for the value of the 30 cycles under firm contract.
NRV of the remaining 70 cycles is Rs 62,000 per cycle (market price of Rs 64,000 per cycle less additional
selling expenses Rs 2,000 per cycle).

(iii) The cost of inventory per cycle as calculated in (i) above is Rs 63,000 per cycle for 30 cycles. Therefore, these 70
cycles have to be valued at NRV of Rs 62,000 per cycle which is lower than the cost of Rs 63,000 by Rs 1,000
per cycle. Therefore, CIL has to write down the value of inventory for these 70 cycles by Rs 70,000 (70 cycles x
write down of Rs 1,000 per cycle).
Value of inventory of 100 cycles on March 31,2024 lower of cost or NRV

Sr. No. Details Amount (Rs )

1 Value of 30 cycles under firm contract 30 cycles x 18,90,000
Rs63,000 per cycle)
2 Value of balance 70 cycles at NRV70 cycles x Rs 62,000 per cycle) 43,40,000
3 Total inventory value 62,30,000
The cost of the imported cycles is Rs 63,00,000 whereas the NRV is Rs 62,30,000. Hence, inventory will be valued at Rs
62,30,000.

56
 CASE STUDY 22
Mr. Manish, registered under GST, is a Chartered Accountant, resident of Pune. Manish has received the technical consultancy
services for his business from his brother - Gaurav who is well settled (financially independent) in Canada. His brother did not
wish to charge any consideration from him for the same, but on insistence of Manish, he charged
Rs 20,000 (consideration in Indian rupees) from him. However, he charges Rs 2,00,000 (consideration in Indian rupees)
from his other clients in India for the same work.
Further, one of its clients, M/s Gupta Sweets, a store located and registered under GST in Maharashtra, had come out with big
discount offer at the time of Diwali on various gift items.
In order to attract more customers, it had decided to supply a gift pack containing 5 packets of Ladila’s Namkeen (200 gram each)
taxable @ 12%, 1 packet of Roasted Smoked Almonds (100 gram) taxable @ 18%, 1 packet of Cournville Chocolate (50 mg)
taxable @ 28% and 1 bottle of Teal Fresh Juice (1 litre) taxable @ 18% in a single basket for a single price of Rs 600
(GST inclusive).
Mr. Manish provides management consultancy and internal audit services to his clients. During 2023, looking to the growing needs
of his clients to invest in the stock markets, he also advised them on Portfolio Management Services whereby he managed
portfolios of some of his clients. Looking at his expertise in financial management, Mr. Jaman, a student of Chartered
Accountancy course, is very much impressed with his knowledge.
He approached Mr. Manish to take guidance on some topics of financial management subject related to his course. Mr. Manish, on
request, decided to spare some time and started providing classes to Mr. Jaman along with some other aspirants for 3 days in a
week and for 1 hours in a day. However, he had not taken any specific permission for such private tutorship from the Council.
Mr. Manish was appointed as the internal auditor of Kapur Pharma Ltd., a company engaged in manufacturing of medicines
based at Pune, Maharshtra, as the company was required to appoint internal auditor as per statutory provisions given in the
Companies Act, 2013. The company is registered under GST in the state of Maharashtra.
The company was founded in 2014 by Dr. Rajesh Kapur, a physician and entrepreneur. Dr. Kapur saw a need for
affordable, high-quality medicines in India, and he founded Kapur Pharma Ltd. to meet that need. The company has grown
rapidly since its founding, and it now employs over 200 people. Dr. Rajesh Kapur is also running a health clinic naming Kapur
Health Clinic. Health Clinic offers a membership program where individuals or families can subscribe to access a variety of
healthcare services for a monthly or annual fee. The subscription fee covers a range of preventive care, primary care, and
wellness services, providing members with convenient and affordable access to healthcare. BMK & Co. was appointed to
conduct statutory audit of Kapur Pharma Ltd. The engagement partner of the firm, Mr. Rajan asked Mr. Manish to provide
direct assistance to him regarding evaluating significant accounting estimates by the management and assessing the risk of
material misstatements.
He also sought his direct assistance in assembling the information necessary to resolve exceptions in confirmation responses
with respect to external confirmation requests and evaluation of the results of external confirmation procedures.
Kapur Pharma Ltd. was considering its projects namely ‘Dehradun Plant’ and ‘Borsad Plant’, respectively, for establishing its
manufacturing units, for which it took assistance of Mr. Manish for providing project appraisal, based on following information:

Project Expected NPV (Rs) Standard deviation (Rs)

Dehradun Plant 2,44,00,000 1,80,00,000
Borsad Plant 4,50,00,000 2,40,00,000
Also, Mr. Manish for asked to provide a brief that how project appraisal is done under inflationary conditions, as the
aforesaid projects faced the similar situation.
Kapur Pharma Ltd. has 200 employees, who are each entitled to five working days of paid sick leaves or each year. Unused sick
leave may be carried forward for one calendar year. Sick leave is taken first out of the current year's entitlement and then out of
any balance brought forward from the previous year (LIFO basis).
At 31st March, 2024, the average unused entitlement is two days per employee. The entity expects, on the basis of experience
that is expected to continue, that 184 employees will take no more than five days of paid sick leaves in 2024-2025 and that the
remaining sixteen employees will take an average of six and a half days each.
The entity expects that it will pay an additional twelve days of sick pay as a result of the unused entitlement that has
accumulated at 31st March, 2024 (one and a half days each, for sixteen employees).
Further, the company has a post-employment medical plan which will reimburse 15% of an employee’s post-employment medical
costs if the employee leaves after more than ten and less than twenty years of service and 40% of those costs if the
employee leaves after twenty or more years of service.
57
 The Assessing Officer within his jurisdiction surveyed the primary business place of Kapur Pharma Ltd. at 11 p.m. for the
purpose of collecting information which may be useful for the purposes of the Income-tax Act, 1961. The place is kept open for
business every day between 10 a.m. and 12 midnight. He impounded and retained in his custody, books of account and other
documents inspected by him, after recording his reasons for doing so, for 12 days.
Kapur Pharma Ltd is producing medication products and can be called high volume based production environment. There are
several different automated production machines located in the plant, through which production of medicines is accomplished
and fulfilled the demands. Plant operates in double shift a day each consisting of 8 hours with 25 minutes’ lunch break and
tea break of 10 minutes. Following data pertains to automated machine ‘M-200’.
M-200
19 April 2024, Wednesday
Breakdown, repair and start up time (unplanned) 90 minutes
Standard cycle time 2.5 minutes per tablet
Quality loss due to scrap, rework, and rejection 40 tablets
Total quantity produced 280 tablets
I. Multiple Choice Questions
1. The place of supply and value of supply of the event management services received from his brother – Gaurav are:
(a) Pune and Rs 20,000 (b) Canada and nil, since place of supply is outside India.
(c) Pune and Rs 2,00,000 since brother is a related person. (d) Pune and nil, since it is not a supply as his brother is
not a related person.
2. Calculate the amount of GST payable in respect of supply of a gift pack in the form of a single basket by M/s Gupta Sweets.
(a) Rs 108 (b) Rs 168 (c) Rs 92 (d) Rs 131
3. Whether Mr. Manish is guilty of professional misconduct in providing private tutorship to Mr. Jaman along with some other
aspirants for 3 days in a week and for 1 hours in a day in the absence of specific approval?
(a) Mr. Manish is not guilty of professional misconduct as he is teaching within prescribed hours i.e. not exceeding 25
hours a month as per Regulation 192A.
(b) Mr. Manish is not guilty of professional misconduct as he is teaching within prescribed hours i.e. not exceeding 25
hours a month as per Regulation 190A.
(c) Mr. Manish is guilty of professional misconduct as he has not obtained specific permission for the same.
(d) Mr. Manish is not guilty of professional misconduct as he is teaching within prescribed hours i.e. not exceeding 25
hours a week as per Regulation 190A.
4. What type of business model is exemplified by Kapur Health Clinic's offering of a membership program for accessing
healthcare services?
(a) Retail Model (b) Franchise Model (c) Subscription Model (d) Consultancy Model
5. Which of the following statements is correct in respect of the survey conducted at the business place of Kapur Pharma Ltd.?
(a) The Assessing Officer’s action in entering the business place of Kapur Pharma Ltd. at 11 p.m. and impounding books
of account and documents inspected by him is in order
(b) The Assessing Officer’s action in entering the business place of Kapur Pharma Ltd. at 11 p.m. is not in order, since
he can enter the business place only after sunrise but before sunset
(c) The Assessing Officer’s action in entering the business place of Kapur Pharma Ltd. at 11 p.m. and in impounding
books of account and documents inspected by him are not in order, since he can enter the business place only after
sunrise but before sunset and he does not have the power to impound books of account under section 133B
(d) The Assessing Officer’s action in entering the business place of Kapur Pharma Ltd. at 11 p.m. is in order but
impounding books of account and documents inspected by him is not in order, since he does not have the power to
impound books of account under section 133B
6. In connection with consideration for Borasad and Dehradun Plant by Kapur Pharma Ltd. Analyse the following -
(i) Which project would have been recommended by Mr. Manish? Explain whether his opinion will change, if coefficient
of variation is used as a measure of risk. Which measure is more appropriate in this situation and why?
(ii) Provide a brief information project appraisal under inflationary conditions as would have been provided by Mr. Manish.
58
 7. (i) Comment whether the entity would require to recognize any liability in respect of employee leaves
State the benefit to be attributed for the employee service for the Iast 20 years, 10 and 20 years and within 10 years
be measured.
8. Referring to the data given of Automated Machnine M-200, your are required to calculate OEE.

ANSWERS TO THE CASE STUDY 22

1. (a) Pune and Rs 20,000
Reason: Since technical consultancy service is not a specified service under sub-section (3) to (13) of section 13
of the IGST Act , 2017, place of supply will be governed by section 13(2) of the IGST Act, 2017 [Default provision]
which provides that the place of supply of services except the specified services shall be the location of the
recipient of services. Thus, place of supply of technical consultancy services is location of Manish, i.e. Pune.
Section 7(1) of the CGST Act, 2017 provides that supply includes importation of services, for a consideration
whether or not in the course or furtherance of business. Thus, importation of technical consultancy service with
consideration amounts to supply under GST.
Persons including legal person are deemed as related persons if they are members of the same family. Further,
Section 2(49) of the CGST Act, 2017 provides that family means, —
(i) the spouse and children of the person, and
(ii) the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the
said person.
Since brother is well settled (financially independent) in Canada, he does not amount to member of the family.
Section 15(1) of the CGST Act, 2017 provides that the value of a supply of goods or services or both shall be
the transaction value, which is the price actually paid or payable for the said supply of goods or services or both
where the supplier and the recipient of the supply are not related and the price is thesole consideration for the
supply. Thus, value of supply of event management services is Rs 20,000.
2. (d) Rs 131
Reason: As per Section 8 of the CGST Act, 2017,
The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a
supply of such principal supply; and
(b) a mixed supply comprising of two or more supplies shall be treated as supply of that particular supply that
attracts highest rate of tax
In order to determine whether the supplies are ‘composite supply’ or ‘mixed supply’, one needs to determine
whether the supplies are naturally bundled or not naturally bundled in ordinary course of business. The concept of
‘naturally bundled’ supplies is emanating from the definition of ‘composite supply’.
Accordingly, the supply which is not naturally bundled and not supplied in ordinary course of business is a mixed
supply that attracts highest rate of tax.
Here, in the gift pack highest rate of tax is of Cournville Chocolate (50 mg) taxable @ 28% and the price of
Rs 600 is GST inclusive. Accordingly, GST payable would be Rs 600×28/128 = Rs 131 (rounded off)
. (d) Mr. Manish is not guilty of professional misconduct as he is teaching within prescribed hours i.e. not exceeding 25
hours a week as per Regulation 190A.
Reason: The Council has passed a Resolution under Regulation 190A granting general permission (for private
tutorship, and part-time tutorship under Coaching organization of the Institute) and specific permission (for parttime or
full-time tutorship under any educational institution other than Coaching organization of the Institute). Such
general and specific permission granted is subject to the condition that the direct teaching hours devoted to such
activities taken together should not exceed 25 hours a week in order to be able to undertake attest functions.
4. (c) Subscription Model
Reason: The correct answer is C) Subscription Model. Kapur Health Clinic's membership program, where
individuals or families can subscribe to access healthcare services for a monthly or annual fee, aligns with the
subscription model. In this model, customers pay a recurring fee to access a service or product regularly over a

59
 specified period. In this case, subscribers pay a fee to access a variety of healthcare services provided by the
clinic, including preventive care, primary care, and wellness services, on an ongoing basis. Therefore, the
subscription model accurately describes the business model of Kapur Health Clinic's membership program.
5. (a) The Assessing Officer’s action in entering the business place of Kapur Pharma Ltd. at 11 p.m. and impounding books
of account and documents inspected by him is in order
Reason: Section 133A of the Income-tax Act, 1961,
The income-tax authority may enter any place of business or profession mentioned above only during the
hours at which such place is open for the conduct of business or profession and in the case of any other place,
only after sunrise and before sunset.
An income-tax authority may impound and retain in his custody for such period as he thinks fit any book of
account or other documents inspected by him after recording reasons for doing so. However, the income tax
authority cannot retain in his custody such books of account etc. for a period exceeding 15 days (excluding
holidays) without obtaining the approval of the Principal Chief Commissioner or Chief Commissioner or Principal
Director General or Director General or the Principal Commissioner or Commissioner or Principal Director or
Director, as the case may be.

6. (i) (a) On the basis of standard deviation project Dehradun Plant be chosen because it is less risky than Project Borsad
Plant having higher standard deviation.
(b) CV of project Dehradun Plant = SD/ ENPV = 1,80,00,000/2,44,00,000 = 0.738 CV of project Borsad Plant =
2,40,00,000/4,50,00,000 = 0.533
On the basis of Co-efficient of Variation (C.V.) Project Dehradun Plant appears to be riskier and hence,
project Borsad Plant should be accepted
(c) However, the NPV method in such conflicting situation is best because the NPV method is in compatibility
of the objective of wealth maximisation in terms of time value.
(ii) Project Appraisal normally involves feasibility evaluation from technical, commercial, economic and financial aspects.
It is generally an exercise in measurement and analysis of cash flows expected to occur over the life of the project.
The project cash outflows usually occur initially and inflows come in the future.
During inflationary conditions, the project cost increases on all heads viz. labour, raw material, fixed assets such
as equipments, plant and machinery, building material, remuneration of technicians and managerial personnel etc.
Beside this, inflationary conditions erode purchasing power of consumers and affect the demand pattern. Thus,
not only cost of production but also the projected statement of profitability and cash flows are affected by the
change in demand pattern. Even financial institutions and banks may revise their lending rates resulting in
escalation in financing cost during inflationary conditions. Under such circumstances, project appraisal has to be
done generally keeping in view the following guidelines which are usually followed by government agencies, banks
and financial institutions.
(i) It is always advisable to make provisions for cost escalation on all heads of cost, keeping in view the rate of
inflation during likely period of delay in project implementation.
(ii) The various sources of finance should be carefully scrutinized with reference to probable revision in the rate
of interest by the lenders andthe revision which could be affected in the interest-bearing securities to be
issued. All these factors will push up the cost of funds for the organization.
(iii) Adjustments should be made in profitability and cash flow projections to take care of the inflationary pressures
affecting future projections.
(iv) It is also advisable to examine the financial viability of the project at the revised rates and assess the same
with reference to economic justification of the project. The appropriate measure for this aspect is the
economic rate of return for the project which will equate the present value of capital expenditures to net cash
flows over the life of the projects. The rate of return should be acceptable which also accommodates the rate
of inflation per annum.
(v) In an inflationary situation, projects having early payback periods should be preferred because projects with
long payback period are riskier.
Under conditions of inflation, the project cost estimates that are relevant for a future date will suffer
escalation. Inflationary conditions will tend to initiate the measurement of future cash flows. Either of the
60
 following two approaches may be used while appraising projects under such conditions:
(a) Adjust each year's cash flows to an inflation index, recognizing selling price increases and cost
increases annually; or
(b) Adjust the 'Acceptance Rate' (cut-off) suitably retaining cash flow projections at current price levels.
An example of approach (ii) above can be as follows: Normal Acceptance Rate: 15.0%
Expected Annual Inflation: 5.0%
Adjusted Discount Rate: 15.0 × 1.05 or 15.75%
It must be noted that measurement of inflation has no standard approach nor is easy. This makes the job of appraisal
a difficult one under such conditions.
7. (i) At 31st March, 2024, the average unused entitlement is two days per employee. The company expects, on the basis
of experience that is expected to continue, that 184 employees will take no more than five days of paid sick leaves in
2024- 2025 and that the remaining sixteen employees will take an average of six and a half days each.
The company expects that it will pay an additional twenty four days of sick pay as a result of the unused entitlement
that has accumulated at 31st March, 2024 (one and a half days each, for sixteen employees).

Therefore, the company would recognize a liability equal to twenty four days of sick pay.

(ii) As per Ind AS 19, the benefit will be attributed till the period the employee service will lead to no material amount of
benefits. And service in later years will lead to a materially higher level of benefit than in earlier years. Therefore, for
employees expected to leave after twenty or more years, the entity would attribute benefit on a straight-line basis.
Service beyond twenty years will lead to no material amount of further benefits. Therefore, the benefit attributed to
each of the first twenty years is 2% (i.e. 40% divided by 20) of the present value of the expected medical costs.

For employees expected to leave between ten and twenty years, the benefit attributed to each of the first ten years
is 1.5% (15 % divided by 10) of the present value of the expected medical costs. For these employees, no benefit is
attributed to service between the end of the tenth year and the estimated date of leaving.
For employees expected to leave within ten years, no benefit is attributed.
8. Calculation of Planned Production Time
Mins.
Total time 480
Less: Planned downtime
tea break 10
lunch break 25
Planned Production Time 445

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 CASE STUDY 28
BL Limited is a bio-technology and pharmaceutical company that is listed on the National Stock Exchange (NSE). It is a small cap
company engaged in research and development, manufacturing and marketing of pharmaceutical formulations and vaccines in
India. It has a factory in Vadodara, Gujarat. The company commenced business in the year 2020-21. Growth has been steady and
the business is profitable, although in the past few years, the entire pharma industry has been growing at a slower pace as compared
to the previous years.
In the last one year, there have been changes in the management. In the previous years, conventional parameters like EPS and
share price was used to assess performance. The new management team wish to assess performance on a value based model in
addition to the conventional parameters. Below are the financial data for BL Ltd.:

Particulars 2023-24 2022-23

Profit After Interest and Tax 5,00,00,000 6,00,00,000
Interest 1,00,00,000 2,40,00,000
Opening Capital Employed 3,00,00,000 2,00,00,000
Closing Capital Employed 4,00,00,000 3,00,00,000
Debt to Equity Debt to Equity
Capital structure 40:60 40:60
% %
Costs of capital
Equity 15.00% 18.00%
Debt (pre-tax-rate) 8% 6%
Tax rate 30% 30%
Stock market information
Average number of shares in issue 50,000 50,000
Nifty 500 Index 18,000 20,000
Nifty Pharma sector index 16,000 18,000
Boline (share price) 25,00 30,00
The management is keen on increasing the company’s potential to generate value sustaining business. Hence, it has felt the need
to measure performance so that periodic assessments can be made. The management of BL Limited wants to adopt the Balanced
Scorecard framework to
link performance measures with business perspective. At the management meeting, the following targets have been set out:
1. Improve Earning Per Share and Share Price by 15% in the coming year.
2. Enter new market segments where existing drug formulations can be sold.
3. Improve production capacity by 30% in order to support increased sales in the new market segments.
4. Hire experienced experts in the fields of pharmaceutical and bio-technology research in order to make innovative, impactful
drug formulations that can capture new markets.
CA Shirish has been appointed as the auditor for the year 2023-24. This is the first year of audit that CA Shirish would be performing
for BL Limited. In the financial statements as of March 31,2024, BL Limited has inventories that are material. CA Shirish is attending
the physical inventory count as on March 31, 2024. However, during the course of the audit he did find certain drawbacks in the internal
controls related to inventory. Therefore, he wishes to ensure that the opening inventory balances as of April 1, 2023 are free of
misstatements that can materially affect the current financial statement.
It has an in-house research and development facility within its factory premises that has been approved by the prescribed
authority. During the financial year 2023-24, the company incurred ₹5 crores on scientific research, the details of which are given
below: Revenue expenses ₹1 crore Capital expenditure (machinery and equipment) ₹2 crore Capital expenditure (land) ₹1 crore
Expenditure on clinical drug trial ₹1 crore
I. Multiple Choice Questions
1. How can EVA of BL Limited be improved?
(a) Operating profits can be improved without investing more capital
(b) Choose projects where additional infusion of capital gives a return that is less than the cost of obtaining this additional
capital
62
 (c) Discontinue projects where the return on investments yield more than the cost of capital
(d) Change the cost of capital to reflect EVA that is favourable
2. Compute the amount of deduction that the company can avail for the scientific research expenditure incurred in the year 2023-
24. The company has not opted for the provisions of section 115BAA/115BAB.
(a) ₹5 crores (b) ₹4 crores (c) ₹3 crores (d) ₹1 crores
3. BL Limited has developed 8 new drug formulations in the current year. Which of the following performance indicators will be
appropriate for to measure the Critical Success Factor of developing commercially successful innovative drug formulations?
(a) Percentage of profit earned from launch of new drug formulations
(b) Number of new drug formulations launched during the year
(c) Investment in research and development
(d) Market share of the company
4. Using the balance scorecard framework, link performance measures to the four business perspectives.
Sr. No. Business measure Sr. No. Business Perspective
1 Improve Earning Per Share and Share Price by 15% in the A Learning and Growth
coming year. Perspective
2 Enter new market segments where existing drug B Internal Business Perspective
formulations can be sold.
3 Improve production capacity by 30% in order to support C Customer Perspective
increased sales in the new market segments.
4 Hire experienced experts in the fields of pharmaceutical and D Financial Perspective
bio-technology research in order to make innovative,
impactful drug formulations that can capture new markets.

(a) 1-A, 2-B, 3-C, 4-D (b )1-D, 2-C, 3-A, 4-B (c) 1-D, 2-C, 3-B, 4-A (d) 1-A, 2-C, 3-B, 4-D
5. BL Limited has identified a critical success factor (CSF) for its organization: “Have an excellent quality product” Which of the
following would be the most suitable key performance indicator for this CSF?
(a) Reduce the number of defects identified by quality control and customers by 15%
(b) Reduce the average time taken to deal with complaints about quality by 10%
(c) Increase sales by 15% over the next year
(d) Increase the number of training hours for the company’s staff
6. Assess the performance of BL Ltd. using Economic Value Added (EVA) method. Assumptions, if any, should be clearly stated.
Analyse the result of earning per share (EPS) and share market information.
Evaluate the broader performance of BL Limited considering EVA, EPS and Share Market information.
7. Enumerate whether CA Shirish has any responsibility towards opening inventory balances as on April 1, 2023.
What will be the responsibilities of CA Shirish in each of the following cases:
(i) He is unable to obtain sufficient appropriate audit evidence regarding the opening balance of inventory.
(ii) On obtaining appropriate audit evidence, CA Shirish concludes that the opening balance inventory contains
misstatements that can materially affect the current year’s financial statements and these misstatements are not
adequately presented or disclosed.
(iii) On obtaining appropriate audit evidence, CA Shirish concludes that the current year’s accounting policies have not
been consistently applied in relation to opening balances or that the changes in accounting policy is not properly
accounted for.

ANSWERS TO THE CASE STUDY 28

1. (a) Operating profits can be improved without investing more apital
Reason: EVA can be improved when operating profits can be improved without investing more capital (that is
more efficiency is build into the business operations).
In statement (b), the return on capital infused should be more than the cost of additional capital. In statement (c),
projects where return is less than cost of capital need to be discontinued. Statement (d) implies that the cost of
capital should be manipulated to reflect a favourable EVA, which is not ethical.
63
2. (b) Rs 4 crores.
Reason: Under section 35(2AB) of the Income-tax Act, 1961, BL Limited, a bio- technology and pharmaceutical
company, can claim deduction of any expenditure on scientific research incurred on in-house research and
development facility approved by the prescribed authority. However, expenditure in the nature of cost of land or
building will not be allowed. Expenditures on clinical drug trials is an allowable expenditure.
3. (a) Percentage of profit earned from launch of new drug formulations
Reason: Percentage of profit earned from launch of new drug formulations will indicate if each of the new launch has
been commercially successful or not. While option (b) indicates the number of new product launches, it does not
capture if these launches have been commercially successful to the company in terms of earning profits. Option (c)
& (d) -Investment in research and development and market share of the company does not indicate the commercial
viability of the product.
4. (c) 1-D, 2-C, 3-B, 4-A
Reason:
(1) Improve Earning Per Share and Share Price by 15% in the coming year. – Financial Perspective
(2) Enter new market segments where existing drug formulations can be sold. – Customer Perspective
(3) Improve production capacity by 30% in order to support increased sales in the new market segments. – Internal
Business Perspective
(4) Hire experienced experts in the fields of pharmaceutical and bio- technology research in order to make
innovative, impactful drug formulations that can capture new markets. – Learning and Growth
perspective
5. (a) Reduce the number of defects identified by quality control and customers by 15%
Reason: Reduce the number of defects identified by quality control and customers by 15% will improve the quality
of the product.
Reduction in the average time taken to deal with complaints about quality by 10%, will in itself not improve the quality of
the product. Increase sales by 15% over the next year does not imply that the quality of the product is excellent. Increasing
the number of training hours for the company’s staff is very generic, as it might not have a direct impact on quality.

6. Calculation of Economic Value Added (EVA):

Particulars 2023-24 2022-23
Profit After Interest and Tax 5,00,00,000 6,00,00,000
Add Interest (net of tax @ 30%) 70,00,000 1,68,00,000
Net Operating Profit after Tax (NOPAT) 5,70,00,000 7,68,00,000
Opening Capital Employed 3,00,00,000 2,00,00,000
WACC(refer working note 1) 11.24% 12.48%
Cost of capital Capital Employed * WACC 33,72,000 24,96,000
EVA = NOPAT – (Capital Employed* WACC) 5,36,28,000 7,43,04,000
Assumptions:
➢ There are no non-cash expenses to adjust the profit
➢ Economic depreciation and accounting depreciation are the same
➢ No lease exists for capitalization
Working Note 1: Calculation of WACC
WACC for the year 2022-23 = Proportion of Equity * cost of equity + Proportion of Debt
* cost of debt (post tax) = 60% * 18% + 40% * (6%*(1-30%)) = 10.80% + 1.68% = 12.48%
WACC for the year 2023-24 = Proportion of Equity * cost of equity + Proportion of Debt
* cost of debt (post tax) = 60% * 15% + 40% * (8%*(1-30%)) = 9% + 2.24% = 11.24%

Assessment of EVA:
BL Ltd. has generated positive EVA of Rs 5,36,28,000 for the year 2023-24. This is much lower than the EVA of the
previous year Rs 7,43,04,000. The value generated is lower by 27.83% ((Rs 7,43,04,000-Rs 5,36,28,000)/ Rs 7,43,04,000).
While this is a concern, it should be noted that lower EVA is not the same as negative EVA. BL Limited did generate
64
 positive value during the year 2023-24 although lower than the previous year. Hence, it is an acceptable performance.
Analysis of Earning Per Share (EPS):
The EPS for the year 2023-24 reduced by 16.67% from Rs 1,200 per share in the previous year to Rs 1,000 per share. For
an investor’s standpoint, this not a favourable performance.
Working note 2: Calculation of Earning Per Share (EPS)

Particulars 2023-24 2022-23

Profit After Interest and Tax 5,00,00,000 6,00,00,000
Average number of shares in issue 50,000 50,000
Earning per share(EPS) 1000 1200

Analysis of Stock Price and Index:

The Nifty 500 Index has dropped lower by 10% between the years 2023-24 while the Nifty Pharma Sector Index dropped by
11.11%. This indicates a downturn in the broader stock market scenario as well as in the pharma sector scenario. In comparison,
the share price of BL Limited declined by 16.67% during the same period. This shows that the downturn with the company
is specifically more than the broad market and industry trends. This is not a favourable performance metric as it shows
shareholders are perhaps not very optimistic about the future performance of the company.
Working note:
Index and Share Price Movement 2023-24 2022-23 Change
Nifty 500 Index 18,000 20,000 10.00%
Nifty Pharma sector index 16,000 18,000 11.11%
BL (share price) 25 30 16.67%
Performance of BL Limited with respect to EVA, EPS and Share Market information.
BL Limited has created positive value for its shareholders by generated an EVA of Rs 5,36,28,000. However, the
performance based on EPS and Share market information indicate that the company is facing higher downturn prospects as
compared to the over all industry and the market. The fall in EVA by 27.83% and the 16.67% fall in EPS are indicators that
the company specific performance is worse than the overall market and the pharma industry. This negative sentiment can be
further inferred by the fall in share price of BL Limited by 16.67% during the same period.
7. As per SA 510, one of the objectives of an audit is to obtain sufficient evidence about whether opening balances contain
misstatements that can materially affect the current year’s financial statements. Audit procedures have to be performed that
can provide relevant evidence regarding opening balances.
In the case of inventories, the closing inventory balance cannot provide appropriate evidence regarding the inventory on
hand at the beginning of the year. Therefore, CA Shirish will have to perform additional audit procedures that can provide
sufficient audit evidence. These may include;
➢ Observing the current physical inventory count, which CA Shirish is already doing as on March 31, 2024.
➢ Reconciling closing inventory quantities to opening inventory quantitates.
➢ Performing audit procedures on the valuation of the opening inventory items
➢ Performing audit procedures on gross profit and cut off.
(i) Where CA Shirish is unable to obtain sufficient appropriate audit evidence regarding opening balances, he should
issue a qualified opinion or disclaimer of opinion in the audit report as is appropriate in the circumstances. (SA 705)
(ii) Where CA Shirish concludes that the opening inventory balance contains a misstatement that can materially affect the
current year’s financial statement and these misstatements are not adequately presented or disclosed, he should
issue a qualified opinion or adverse opinion in the audit report as is appropriate in the circumstances. (SA 705)
(iii) Where CA Shirish concludes that the current year’s accounting policies have not been consistently applied in relation to
opening balances or that the changes in accounting policy is not properly accounted for, he should issue a qualified
opinion or adverse opinion in the audit report as is appropriate in the circumstances. (SA 705).
In addition, in each of the above situations, as part the audit procedure CA Shirish should communicate with the management
or those charged with governance.

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 CASE STUDY 36
StayInn Limited is a well established company that runs chains of hotels and resorts across different locations in India.

“StayInn Budget” hotels

The hotels operate as budget hotels and operate under the brand “StayInn Budget”. It provides accommodation for cost-conscious
travellers visiting the city for short stay lasting a day or two. Typically a room in “StayInn Budget” hotels would provide comfortable beds,
high speed internet connection, air conditioning facility, coffee machine, fridge and free television service. Food service based on a
limited menu is provided on the premises. It has few conference rooms that provide space for guests to hold business meetings. This
saves them precious time otherwise wasted in travelling on congested city roads. The hotel provides free shuttle service to and
from the airport at specific times during the entire day. Proximity to the airport, the free shuttle service and convenience of
conducting work at the conference rooms have been marketed to attract guests to stay here. The guests also comprise of people
who are in transit between airports. Also when there are long-duration delays in flight operations due to which passengers need to
be provided overnight accommodation, few airline operators host their guests here. Like all other guests, these airline operators
are also interested in for its location and low-cost room rental.
In all, StayInn Limited has 15 hotel properties spread over 15 cities. All of them function under the “StayInn Budget” brand catering
to cost-conscious travellers. In all these establishments, since the location of the hotel is near the city airport, the real estate
cost, both for ownership and rental is very high. Hence, instead of having an in-house establishment for cleaning and food
service, the company has outsourced these services to specialized vendors. This will reduce the additional space requirement
needed to maintain the facilities to provide these services. This will help to keep its costs of operations within control. Since the
hotel property is in the city, there is ample availability of vendors providing this service. Cleaning service includes cleaning of kitchen
crockery, bedding, laundry and housekeeping of premises. Similarly, the entire set of activities related to preparation of food has
been outsourced. Vendor service has been satisfactory, barring few instances where guests have complained of unhygienic rooms or
non-palatable food service. However, due to high guest volume and quick turnover of guests due to short stay periods, this has
never been a hindrance to business.
This business model has been profitable since its establishment. StayInn Limited has a sizeable market share in this segment.
Competition has increased in the recent past. Price wars have put pressure on profit margins of the budget hotel segment. Room
rates are increasingly being determined by the prevailing market rates in the respective locations

“StayInn Comfort” Resorts

The management plans to continue to operate in the budget hotel to maintain its market presence. At the same time, to
sustain business in the long term, the management of StayInn Limited has forayed into developing properties for luxury
resorts under a separate new brand called “StayInn Comfort”. Target guest segment are vacationing tourists interested in a
enjoying a laid-back time in scenic places. These guests would not mind paying premium for availing good quality service.
Maintaining cleanliness of premises and food service are critical activities in the operation of luxury hotels. Unlike cities, the
location of these resorts is in more sparsely populated areas. While there are vendors providing cleaning and food services, there
are limited options to choose from.

Customer satisfaction is paramount to sustain and grow business in the luxury resort segment. With the ability to post reviews
online on booking portals, any negative review (whether justified or not) can reach very easily to a large number of potential
guests. This can negatively impact future business.
StayInn Limited is developing a “StayInn Comfort” property in Goa. Below are the expenses being incurred to construct the new
resort at Goa.

Particulars Cost incurred (Rs)

Purchase of land 15 crores

Site preparation costs, cost of dismantling existing structures on site 2 crores
Direct Material costs 8 crores
Direct Labour costs (including Rs20 lakh that was incurred during a labourstrike) 3 crores

66
 Testing the safety of construction at the resort site 0.5 crores
Consultation fee (Legal and architect) related to construction of resort 1.5 crores
Relocation of expense of resort manager from Mangalore to Goa 0.10 crores
Administration and General overheads allocated to the project by corporateoffice 0.50 crores
The property is being acquired from an unrelated party at arm’s length transaction value. Five out of the six directors were
present at the Board Meeting to consider and pass the resolution to acquire the property.

The operations at the Goa resort started as per the expected timeline. It is in its 3 rd year of operations. At a recent management
meeting, following is the information was made available for the “StayInn Comfort” Goa resort:

Particulars Amount
Net Operating Profit before Interest and Tax 5 crores
Depreciation expense 3 crores
Change in working capital 4 crores
Capital expenditure 5 crores
Invested capital 20 crores
Weighted Average Cost of Capital (WACC) 8%
Tax Rate 30%
I. Multiple Choice Questions
1. For the “StayInn Budget” properties, identify the listed activities to the five primaryactivities of Michael Porter’s value chain
model.

Sr. No. Listed Activity Sr. Primary activity as per

No. value chain model
A Storing vendor delivered freshly laundered crockery, bedding and laundry I Operations
for future use as per guest requirements
B Ensuring cleanliness and safety of rooms, working order of facilities II Marketing and Sales
offered like TV and internet service, coffee machines.
C The review of food items to remove the ones past expiry to ensure III Inbound Logistics
customer satisfaction and safety
D Free shuttle service to attract guests tostay at the hotel IV Service
E Front desk activities handling complaints,customer support V Outbound Logistics

(a) A – I, B – III, C – IV, D – II, E – V (b) A – III, B – I, C – V, D – II, E – IV

(c) A – I, B – IV, C – V, D – II, E – IV (d) A – III, B – I, C – II, D – IV, E – V
2. As regards “StayInn Comfort” resorts, the parameters relating to high quality cleanliness and food service can be classified
under which attribute of the following under the Kano Model?
(a) Performance attribute (b) Delight attribute (c) Threshold attribute (d) Indifferent attribute

3. Which of the following statements is true as regards to the resolution taken at the Board Meeting to acquire the property
in Goa?
(a) When all five directors of StayInn Limited attending the meeting consent to the acquisition of property
(b) When any four directors of StayInn Limited out of the five attending the meeting consent to the acquisition of
property
(c) When any three directors of StayInn Limited out of the five attending the meeting consent to the acquisition of
property
(d) When all six directors, representing the total strength of directors at StayInn Limited should consent to the acquisition
of property

4. Calculate the Economic Value Added (EVA) of the “StayInn Comfort” Goa.
(a) Rs 1.60 crores (b) Rs 4.60 crores (c) Rs 0.40 crores (d) Rs 1.90 crores
67
5. Which of the following statements would be true?

(a) StayInn Limited should outsource all its cleaning and food service operations in all its properties ignoring the risks of
outsourcing, if the cost of outsourcing is less than the cost of providing this service in-house. This is because the
Economic Value Added (EVA) of the company will be positively impacted despite the risk of outsourcing.

(b) StayInn Limited make an absolute comparison of Economic Value Added (EVA) of one property with that of another
irrespective of the difference in scale of their respective operations.

(c) StayInn Limited should reconsider the feasibility of operating properties where the Economic Value Added (EVA) is
negative.

(d) Economic Value Added (EVA) as a measure takes into account the current purchasing power and adjusts for
inflationary trends. Hence, it is a more appropriate measure to track as compared to book profit.

6. (a) Explain the risks of outsourcing cleaning and food services for the “StayInn Comfort” luxury resort properties.

(b) What would your suggestion be, if the management of StayInn Limited determines that guests experience (primarily
influenced by cleanliness of facilities and food service) is a very important critical success factor (CSF)?

(c) How is this risk different from outsourcing cleaning and food services for the “StayInn Budget” hotel properties with
that for “StayInn Comfort” resorts?

(d) What benefit does StayInn Limited derive by operating different properties under two separate brands?

7. Identify the total costs to be capitalized under Indian Accounting Standard 16, Property, Plant and Equipment for the “StayInn
Comfort” resort being developed in Goa.

ANSWERS TO THE CASE STUDY 36

1. (b) A – III, B – I, C – V, D – II, E – IV

Reason:
A Storing vendor delivered freshly laundered crockery, bedding and laundry for future use as per guest
requirements – Inbound Logistics as it relatesto activities of receiving, handling of materials from the supplier
and their storage until further use later in operations.
B Ensuring cleanliness and safety of rooms, working order of facilities offered like TV and internet service, coffee
machines – Operations as these are activities related to converting inputs into production of output or service.

C The review of food items to remove the ones past expiry to ensure customer satisfaction and safety –
Outbound Logistics as it relates to storage and movement of the end product from the production line to the
customer.
D Free shuttle service to attract guests to stay at the hotel – Marketing and sales as these are activities related
to communicating, selling and delivering the product or service to the customer.

E Front desk activities handling complaints, customer support – Service includes after sale service, handling
customer complaints, customer support, training etc. It is one of the most important activities in their value
chain model. Good service ensures happy guests.
2. (c) Threshold attribute
Reason: Threshold attribute as this is feature that is taken for granted by the guests at the resort. However, if the
required quality is not met it would cause dissatisfaction.

3. (a) When all five directors of StayInn Limited attending the meeting consent to the acquisition of property
Reason: the resolution will be taken as passed when all five directors of StayInn Limited attending the meeting
consent to the acquisition of property
68
4. (d) Rs1.90 crores. EVA = NOPAT less capital charge on invested capital
Reason: Net Operating Profit After Tax (NOPAT) = Net Operating Profit before Interest and Tax Less Taxes
= Rs 5 crores less 30% of Rs5 crores = Rs3.50 crores.
Capital charge on invested capital = WACC * Invested capital = 8% * Rs20 crores = Rs1.60 crores.
Therefore, EVA = Rs 3.50 crores less Rs 1.60 crores = Rs1.90 crores.
5. (c) StayInn Limited should outsource all its cleaning and food service operations inall its properties ignoring the risks of
outsourcing, if the cost of outsourcing is less than the cost of providing this service in-house. This is because the
Economic Value Added (EVA) of the company will be positively impacted despite the risk of outsourcing.

Reason:
StayInn Limited should reconsider the feasibility of operating properties where the Economic Value Added (EVA) is
negative. Negative EVA implies that the profits from the property does not cover the cost of invested capital.

6. (a) Risks of outsourcing cleaning and food service under the luxury resort model:
In the luxury resort business under the brand “StayInn Comfort”, the target guests are travellers on leisure. The primary
feature of this model would be "good quality of service". Maintaining cleanliness of premises and food service are
critical activities in the operation of luxury hotels. Therefore, customer satisfaction on these metrics is paramount to
sustain and grow business. With the ability to post reviews online on booking portals, any negative review (whether
justified or not) can reach very easily to a large number of potential guests. This can negatively impact future
business. Hence, “StayInn Comfort” brand has to deliver the quality of service that it provides in terms of cleanliness
and food that should meet and beat the guests' expectation.
Outsourcing these services to well established vendors is advantageous since the focus can remain on improving guest
experience. It may also be cost advantageous in many cases. However, there a number of risks in this model.

(1) The required quality of service for “StayInn Comfort” resort properties should be delivered by these vendors.
Detailed service level agreements need to drawn up to ensure this. StayInn Limited should be able to monitor
the performance of these vendors. In cases of non-delivery of the required level of service, the agreement should
provide for means of redressal. This could vary from compensation for any loss in business to immediate
termination of service.
(2) StayInn Limited should ensure that it can easily and economically switch service providers if required. For this
it has to identify alternate vendors who can provide the same level of service as the current ones. At the same
time, since the resorts are in locations where the number of vendorsproviding these services is limited, it increases
the risk of outsourcing these services. The other risk in outsourcing could be of instances where well
performing vendors could go bankrupt and shut shop. In such cases, resort operations could be immediately
impacted since such services can no longer be availed from these vendors. Again, list of alternate service
providers is a necessary back-up that the hotel should have.
(b) Where the management of StayInn Limited determines that guests experience (primarily influenced by cleanliness of
facilities and food service) is a very important critical success factor (CSF) it may choose not to outsource these
activities to outside vendors. Quality control issues and poor customer service may wipe out any cost savings
attributed to lower expenses from the outsourcing model. StayInn Limited would then have to consider developing in-
house departments that cater to cleanliness and food service. Control over factors such as input material used, the
performance of service, equipment used, training of staff and other essential activities can ensure that the required
service quality can be achieved. Better service enhances guest experience through these critical activities. Compared
to outsourcing, this might be a costlier option. However, since the guests are ready to pay a premium for service
quality, StayInn Limited could choose to charge higher rates for its resort properties.
(b) The difference between the risk of outsourcing for “StayInn Comfort” and “StayInn Budget” driven by the difference in the
focus and target customer segment of their respective business models. “StayInn Budget” focuses on providing value
for money to the cost conscious short stay guests while “StayInn Comfort” focuses on customer experience through
quality of service provided to the guests staying on longer vacations.
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 As regards “StayInn Budget” due to high real estate cost, both for ownership and rental, the cleaning and food
service has been outsourced. This enables StayInn Hotels to keep the costs of operation low, which is very
criticalfor the business model of “StayInn Budget”. Hence, instances of dis-satisfaction among guests as regards
quality of cleaning and food service, within certain limits will not negatively impact business. These activities are
non-core and hence can be considered for outsourcing. For “StayInn Budget”, the critical success factor (CSF) is
low cost of operations in order to be able to offer guests rooms at reasonable rates.
As regards “StayInn Comfort” where CSF is guests experience, which is primarily influenced by cleanliness of facilities
and food service, these activities become core activities, hence the risks of outsourcing are higher. Therefore, there
may need to be a consideration whether to outsource these activities at all. Pricing for rooms at these resorts can
factor any additional costs to be incurred to ensure the delivery of the required quality of service in these resorts.
(c) Branding of properties under either “StayInn Budget” and “StayInn Comfort” makes helps potential customers
determine their expectations from each of such properties. Based on these expectations the customer appeal can be
distinctly determined for each of these properties. This will help them choose which property could potentially satisfy their
expectations better. Thus by operating different properties under either “StayInn Budget” or “StayInn Comfort” brand,
StayInn Limited has created a brand strategy that can effectively communicate their product and service offering to
potential customers.

7. Computation of total cost of construction of StayInn Comfort” resort being developed in Goa
as per Indian Accounting Standard 16, “Property, Plant and Equipment”
Particulars Cost incurred (Rs)
Purchase of land 15 crores
Site preparation costs, cost of dismantling existing structureson site 2 crores
Direct Material costs 8 crores
Direct Labour costs (including Rs20 lakh that was incurredduring a labour strike) 2.8 crores
Testing the safety of construction at the resort site 0.5 crores
Consultation fee (Legal and architect) related to constructionof resort 1.5 crores
Total cost to be capitalized StayInn Comfort” resort beingdeveloped in Goa as per 29.80 crores
Indian Accounting Standard 16.

Relocation expense of hotel manager from Mangalore to Goa and administrative and general overheads allocated to the
project by corporate office are not capitalized under Indian Accounting Standard 16. Direct labour costs incurred during a
labour strike is not attributable to construction of resort and hence not capitalized. All other costs are directly attributable to the
construction of the resort.

CASE STUDY 37
Background
Riddhi and Siddhi are siblings residing in a remote village in north-east India. Over the years Riddhi and Siddhi observed that
rampant and unchecked industrialisation is causing irreparable damage to the local environment and create health related issues for
the residents. Dwindling air quality further added to the health-related issues.

The siblings graduated from a renowned medical college from Delhi. Armed with medical knowledge, they incorporated RISI Limited
– a super-speciality hospital. The 303-bed hospital established in Assam delivers the highest quality of medical care through its team
of expert doctors, nurses, technicians and management professionals. The hospital has Centres of Excellence in oncology, including
surgical, non-interventional cardiology, cardiac surgery, gastroenterology and kidney transplant and neurology. The hospital also has
robust critical care capabilities both adult and paediatric. Their business grew exponentially, and the equity shares of the Company
were eventually listed on the Bombay Stock Exchange. Riddhi and Siddhi were appointed as Directors on the Board of the Company.
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The current status of RISI Limited described as follows:
Since incorporation the mission of the Company remained consistent basis the initial understanding of the Founders i.e. to create
a world-class integrated healthcare delivery system in India, entailing the finest medical skills for finest clinical excellence
and distinctive patient care. Since then, the mission has not been revised. In quarterly meetings senior management expresses
their desire to improve profitability, result oriented, innovate and learn. Occasionally, in informal meetings employees are told to work
ethically and honestly.
The general environment, in which RISI Limited operates, is made up of elements of the broader community that have an influence on
the healthcare industry and the company within it. Thereis a trend towards continuous research and development for the treatment
of cancer, AIDS and the improved quality of life. More complex diagnostic equipment is being utilised on a daily basis in the
healthcare industry, an example is the challenges of microscopic and endoscopic surgery.

RISI Limited analyse the internal and external environment of the organisation. It is thus how; the organisation's resources are
allocated optimally by considering the analyses done, to achieve its goals. The plan devised as part of strategy illustrates the
aims to improve the organisation's position and how it plans to respond to its external environment and where it needs to
position itself to maximise its strengths and gain success in doing so.

RISI Limited has a flat fee structure as it believes in easy access to affordable healthcare systems. The Company has cost effective
prices in relation to its competition. This strategy had indeed made a mark for the Company in the State of Assam. However, due to
increased earnings, newer generations, expects a better healthcare experience for which they are willing pay an extra amount.

The implications of technological advances have created opportunities for RISI Limited toresearch and form guidelines and
protocols for the use of any new technology to try and curb unnecessary expenditure, by ensuring that it is used cost-effectively,
appropriately and rationally. During the last year, the Company attempted to enter into a joint venture with an entity specialising in
treatment of cancer. However, the attempt failed. In the current year, the Company tried to enter into a strategic alliance with an
entity undertaking research in AIDS. Despite multiple attempts the deal did not go through. As per Company’s own estimate,
these two alliances would have provided a significant fillip to the diminishing profitability of the Company.
The RISI Limited reduces the costs of medical facilities by controlling the behaviour of patients and healthcare providers. Control
functions manage the interfaces between healthcare services, thus through this, a continuum of internal control to transactional
control is exercised. The Company especially owns strategic value in terms of their technological resources: computer soft- and
hardware and also in the financial and organisational resources that have been put in place.
The Company require its professionals to have a wide range of technical skills to provide the best healthcare services and soft
skills to provide the best possible patient care. These professionals employ unique skills depending on the patient and situation.
Healthcare capabilities help engaging with patients, influence how to communicate with them and provide optimum healthcare
services. These skills help the Company showcase why it is an ideal choice and what differentiates the Company from
competitors. The development of human capital is deemed to be part of the management of knowledge by the Company. Human
capital refers to the knowledge and skill of all the employees.
RISI Limited has in the past invested in the training and further development of personnel, as training and development is essential
to ensure that personnel know how to do their jobs and at the same time keep up to date with the latest techniques and
technology. Separate budgeting was done for development and training purposes.
Management and employee performance indicate that the Company has employed many skilled and capable staff. Unfortunately, it
has not made provision for the rapid growth that has taken place in the organisation. Recognition and growth opportunities appear
to be the greatest problems experienced at this time. There is also no reward system for excellence.
The Company believes that performance reviews are crucial to the forward progress of both organization and the employees who
operate them. These reviews are expected to improve team productivity and workplace satisfaction. The Company follows
traditional performance appraisals. A manager and employee meet to review the employee's work performance annually. There
are no set time limits on the completion of performance reviews. Typically, it was observed that a large number of employees on
an average spends 15 minutes spend time with their manager at the end of the every year to discuss their performance. A preset
rating system is used to guide the conversation. These rating criteria were framed by the Founders in discussion with a renowned
consultant having expertise in manufacturing sector.
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Decision-making systems in the Company are utilised within the organisational context, they range from budget and financial
systems to very structured computer systems and even complex expert systems. These systems work in silos. The strategic value that
has been added by these system has contributed to the development of staff skills and abilities and thus to the company’s competitive
advantage. Recently, the Company had hired an external consultant to suggest new systems. These new systems use cutting edge
technologies and involve the use of generative technologies, machine learning and artificial intelligence. These new systems, if
implemented across the Company’s value chain would significantly overhaul the Company and usher the entity into a new era of
data management and objective decision making. The Company is apprehensive of using the these new tools.
The decision-making systems are diverse and meet the requirement of every department. A large part of the data required for
decision making purpose is maintained in spreadsheets by a capable and dedicated team of professionals. For decision making at the
higher level a separate team of professionals are employed to extract the data from peripheral systems of every department and
feed the data into the main system of the entity.
the organisation’s different departments or units relate to each other, and have been described in the organisation charts and
group and ownership structures. The Company has been divided in four main functions and are regarded and function as
independent profit centres. These Strategic Business Units (SBUs) form is part of a multidivisional structure, which consists of the
top level being corporate headquarters. The units function as profit centres and are thus responsible for their own budgets. They
are to continuously follow through on their own objectives and strategies. These business units have their own core functions, but
share common business, financial, administrative, and human resource policies.

Company’s culture and employees’ common and shared way of behaving and thinking. RISI Limited values and culture has been
built on a foundation of absolute honesty, professional integrity, capability and quality. The company is very supportive in terms of
its human capital. Any partnerships that are entered into are for shared advantage and to have created a winning recipe.

The Company makes a point of focussing all new staff towards a client and results orientation. Another very important, almost
critical element of RISI Limited is the management and warehousing of data, as well as the leverage of information technology. It
has been ingrained in the culture that service quality is extremely important, and a high service level and service quality is to be
maintained all the time.
The Company’s staff is made up mostly of healthcare professionals, information technology staff and office support staff. Staff
members become major stakeholders in the organisation, as their employment provides job security and job satisfaction. The
Company’s staff refers to the type of people employed in the organisation with their different backgrounds, orientation towards
clients, values and technology that makes the organisation successful. The organisation hires able people, train them well and
assign them to the correct jobs. RISI Limited has always maintained an excellent reputation in the healthcare industry in terms of
their knowledge resources; they have been known to be non-confrontational and rather to negotiate. Joint Ventures that they
have entered into supports the brand name further.
A majority of the staff in the initial level comprise of female health care professionals. However, in middle and top level, the gender
ratio is skewed toward the male professionals. A recent study shown that the Company losses 30% of its female work force in every 3
years. The Company has regular alumni meet to meet the ex-employees.
For the purpose of book closure of the financial statements for the current year – 31 December 20X4, Riddhi and Siddhi, met Ms
Nidhi, CEO of the Company along with the auditor to discuss the audit plan and audit observations, if any. Ms Nidhi informed
that the Company is expected to earn profits during the current year. The auditor highlighted that the audit is progressing and the
observations till date are as follows:

Issue – 1
RISHI Limited had entered into a contract with Vahan Chalak Limited- a transport agency - to use a particular ambulance van
specified in the contract for a period of 7 years. Vahan Chalak can substitute another ambulance van only in case of breakdown
of the van. As per the terms of contracts, during the 7-year contract period, the driver hired by RISHI Limited can operatethe
van and RISHI Limited decides how to use the van (such as when it is used and on which route it will operate). However, there are
certain contractual limitations to protect the interest of Vahan Chalak in the truck, i.e., restrictions on making modifications.

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 Issue – 2
USA Chemical, an entity domiciled in USA, manufactures, and sells life saving drugs. RISI Limited entered into a contract:
 Involving purchase of 2 cartons of chemical on 1 October 20X4, when the price of the chemical is USD 100,000 per KG
 Delivery date of chemical 31 January 20X5 (conversion rate INR 160 = USD 1).
 Paid an upfront deposit of USD 40,000 (conversion rate INR 100 = USD 1) to the supplier.
 Deposit will be deducted from the total purchase consideration which is due to be paid on 28 February 20X5 (conversion
rate INR 150 = USD 1).

Issue – 3
During the year remuneration of INR 2,00,00,000 was paid to Ms Nidhi, the CEO of theCompany. Ms Nidhi is a Chartered Accountant
with deep experience in recycling industry. ESOPs were issued as follows:

 First tranche of 7,000 equity settled ESOP granted at the beginning of the year
- Grant date fair value INR 100 per ESOP
- Vesting, exercise (at nil exercise price) of ESOP and allotment of equivalent equity shares were completed by the
year end.
- Exercise date fair market value: INR 150 per ESOP.
- Allotted shares constitute 0.1% of paid up share capital.

 Second tranche of 3,000 ESOP were also granted at the beginning of the year

- Vest period would end by the end of the next year.

As per the auditor the managerial remuneration paid to Ms Nidhi exceed the prescribed limits as follows:
Rounded to nearest INR lakhs
Profit before tax– as per Statement of Profit and Loss 1,000
Less: Unrealised gain of INR 10 lakhs (10)
Net profit under section 198 of the Companies Act, 2013 990
Maximum limit under section 198 of the Companies Act, 2013 109
(11% of above net profits)
Salary paid and recognised in the Statement of Profit and Loss 100
Excess managerial remuneration 9
Issue – 4
RISI Limited had entered into a contract with SIRI LLP to purchase certain materials. Majority of the capital of SIRI LLP is held
by IRIS LLP whose majority capital is held by Vaani Sole Proprietor incorporated by a friend of Riddhi. IRIS LLP holds 5% of share
capital of RISI Limited. The key terms and conditions are as follows:
 Initially 10,000 KG of material will be purchased for INR 600 crores.
 Subsequently 15,000 KG of material will be purchased for INR 500 crores.

The CEO of the Company believes that the above transaction is not a related party transaction under SEBI Listing Regulations.
I. Multiple Choice Questions
1. Assuming that the conversion rate of USD 110 = USD 1 exist as on 31 December 20X4, at what amount should the foreign
currency deposits and foreign currency trade payable be recognised in the financial statements for the year ended 31
December 20X4?
(a) Recognise foreign currency deposit at INR 44 lakhs and foreign currency payable at INR 1.76 crores. The foreign
currency deposit and foreign currency payable should be translated using the exchange rate as at year end 31
December 20X4.
(b) Recognise foreign currency deposit at INR 60 lakhs and foreign currency payable at INR 1.76 crores. The foreign
currency deposit and foreign currency payable should be translated using the exchange rate as at 28 February 20X5
(i.e.. the settlement date) and the exchange rate at yearend 31 December 20X4 respectively.
(c) Recognise foreign currency deposit at INR 44 lakhs and foreign currency payable at INR 2.56 crores. The foreign
73
 currency deposit and foreign currency payable should be translated using the exchange rate as at 31 December 20X4
(i.e.. year end) and the exchange rate at 31 January 20X5 (i.e.. delivery date) respectively.
(d) Recognise foreign currency deposit at INR 40 lakhs. Foreign currency trade should not be recognised. The foreign
currency deposit should be recognised using the conversion rate of 1 October 20X4 (i.e.. date of deposit).

2. Whether the computation of excess managerial remuneration is in accordance with provisions of the Companies Act, 2013?
(a) Yes–Managerial remuneration is within prescribed limits (b) No – Excess managerial remuneration is INR 7 lakhs

(c) No – Excess managerial remuneration is INR 3 lakhs. (d) No – Excess managerial remuneration is INR 19 lakhs.

3. Whether the CEO is correct in her conclusion that the purchase of raw materials from SIRI LLP would not qualify as a related
party transaction under SEBI Listing Regulations?

(a) Yes. SIRI LLP is not a related party as per SEBI Listing Regulations. Thus, any transaction with SIRI LLP would not
qualify as a related party transaction under SEBI Listing Regulations.

(b) No. SIRI LLP is a related party as per SEBI Listing Regulations as it is controlled by a friend of Riddhi – a key
managerial personnel of RISI Limited. Thus, any transaction with SIRI LLP would qualify as a related party transaction
under SEBI Listing Regulations.
(c) No. Non-reduction of purchase consideration indicate that the purpose and effect of the transaction benefit Riddhi - a
key managerial personnel of RISI Limited. Thus, any transaction with SIRI LLP would qualify as a related party
transaction under SEBI Listing Regulations.

(d) Yes. Non-reduction of purchase consideration indicate that the purpose and effect of the transaction benefit Riddhi - a
key managerial personnel of RISI Limited. However, the transactions are individually below the qualifying threshold
of INR 1,000 crores. Thus, the transaction with SIRI LLP would not qualify as a related party transaction under SEBI
Listing Regulations.
4. Whether the transaction for purchase of raw materials from SIRI LLP require approval of Audit Committee and/ or shareholders
under the SEBI Listing Regulations?

(a) Yes. Only approval of the Audit Committee is required since it is not a related party transaction.

(b) Yes. Prior approval of the Audit Committee is required. Since the aggregate transactions exceed the qualifying
threshold of INR 1,000 crores, prior approvalof shareholder is also required.
(c) Yes. Prior approval of the Audit Committee is required. Since the aggregate transactions exceed the qualifying
threshold of INR 1,000 crores, approval of shareholder is also required.
(d) Yes. Individually the transactions do not exceed the qualifying threshold of INR 1,000 crores. Accordingly, prior
approval of the Audit Committee is required.
5. Which of the following strategic considerations should RISI Limited focus on to address emerging needs and improve its
market position?
i. Continue with the current flat fee structure without any changes.

ii. Update the mission and strategic objectives to incorporate profitability, innovation, and ethical practices.
iii. Need for a revised approach to partnerships and collaborations.
iv. Implementing the new systems suggested by the external consultant, which involve generative technologies, machine
learning, and AI.
Options
(a) i, ii (b) ii, iii (c) iv only (d) iii, iv
6. Whether RISHI Limited has the right to direct the use of the ambulance van while assessing the lease contract?
7. RECOMMEND how aligning actions and decisions with each element of the McKinsey 7S model can help RISI Limited
enhance organizational effectiveness, resilience, and long-term sustainability in the healthcare industry while addressing
potential inefficiencies and challenges?

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ANSWERS TO THE CASE STUDY 37
1. (d) Recognise foreign currency deposit at INR 40 lakhs. Foreign currency trade should not be recognised. The foreign
currency deposit should be recognised using the conversion rate of 1 October 20X4 (i.e. date of deposit)

Reason: Under Ind AS 21, monetary items are units of currency held and assets and liabilities to be received or
paid in a fixed or determinable number of units of currency. At the end of each reporting period foreign currency
monetary items shall be translated using the closing rate.

The deposit of INR 40 lakhs on 1 October 20X4 represents a prepayment of the cost of chemical and will
consequently be accounted for as a non-monetary item. Therefore, RISHI Limited will not retranslate the foreign
currency deposit at the balance sheet date ie. 31 December 20X4. RISHI Limited will recognise the balance trade
payable at the point of delivery (which falls after the year-end).

2. (a) Yes–Managerial remuneration is within the prescribed limits

Reason:
Rounded to nearest INR lakhs

Profit before tax – as per Statement of Profit and Loss 1,000

Add: Salary paid and recognised in the Statement ofProfit and Loss 100
Add: ESOP expense recognised in the Statement of Profit and Loss 9
[7,000 ESOP X INR 100 (i.e. grant date fair value)] + [3,000 ESOP X INR
100 (i.e. grant date fair value)/ 2 (i.e. vesting period)]*
Less: Unrealised gain** (10)
Net profit under section 198 of the Companies Act,2013 1,099
Maximum limit under section 198 of the Companies Act, 2013 - (11% of 121
above net profits)
Salary paid and recognised in the Statement of Profitand Loss 100
Add: Value of ESOP determined as perquisite underIncome Tax Act, 11
1961[7,000 ESOP X INR 150 (i.e. exercise date fair value)]
Managerial Remuneration as per Section 2(78)*** of Companies Act, 2013 111
Managerial remuneration exceeds the prescribed limit No
* Ind AS 102 requires ESOP cost is recognised at grant date fair value over the vesting period

** Unrealised gain to be reduced as per Section 198(3)(f) of Companies Act, 2013.

*** Under section 2(78) of Companies Act, 2013 remuneration means any money or its equivalent given or passed
to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961.
3. (c) No. Non-reduction of purchase consideration indicate that the purpose and effect of the transaction benefit Riddhi - a
key managerial personnel of RISI Limited. Thus, any transaction with SIRI LLP would qualify as a related party
transaction under SEBI Listing Regulations.

Reason: Under Regulation 2(1)(zc)(ii) of SEBI (LODR) Regulations, 2015 related party transaction means a transaction
involving a transfer of resources, services or obligations between a listed entity or any of its subsidiaries on one hand,
and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity
or any of its subsidiaries, with effect from April 1, 2023 regardless of whether a price is charged and a “transaction” with
a related party shall be construed to include a single transaction or a group of transactions in a contract.
In the extant case the purchase of raw material is routed through entities with seemingly unrelated parties
(unrelated party introduced as a subterfuge).
4. (b) Yes. Prior approval of the Audit Committee is required. Since the aggregate transactions exceed the qualifying threshold
of INR 1,000 crores, prior approval of shareholder is also required.

Reason: Regulation 23(2) of SEBI (LODR) Regulation, 2015 interalia prescribe that “All related party transactions
[and subsequent material modifications] shall require prior approval of the audit committee “
75
 Regulation 23(4) of SEBI Listing Regulation interalia prescribe that “All *material related party transactions [and
subsequent material modifications as defined by the audit committee under sub-regulation (2)*] shall require [prior]
approval of the shareholders through resolution……”
* A transaction with a related party shall be considered material, if thetransaction(s) to be entered into individually
or taken together with previoustransactions during a financial year, exceeds rupees one thousand crore or ten per
cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed
entity, whichever is lower.
5. (b) ii, iii
Reason: RISI Limited's core strategy spins around providing high-quality, affordable healthcare. This strategy has
led to a flat fee structure, making healthcare accessible to a broader population in Assam. However, there's an
emerging need to cater to newer generations willing to pay a premium for better healthcare experiences.
The company should consider updating its mission and strategic objectives to incorporate profitability,
innovation, and ethical practices.

Unsuccessful efforts in establishing strategic alliance highlight the requirement for a revamped strategy in forming
alliances and collaborations. Considering new joint ventures or strategic alliances with a more organized approach may
improve bothprofitability and service offerings.

6. Paragraph B24 of Ind AS 116 provides that a customer has the right to direct the use of an identified asset throughout the
period of use if the customer has the right to direct how and for what purpose the asset is used throughout the period of
use.
Paragraph B30 of Ind AS 116 states that a contract may include terms and conditions designed to protect the supplier’s
interest in the asset – generally known as protective rights. Protective rights typically define the scope of the customer’s
right of use but donot, in isolation, prevent the customer from having the right to direct the use of an asset. For example,
a contract may include following protective rights:

➢ Specify the maximum amount of use of an asset or limit where or when the customer can use the asset,

➢ Require a customer to follow particular operating practices, or

➢ Require a customer to inform the supplier of changes in how an asset will be used.

In the given case, RISHI Limited has the right to direct the use of the ambulance van throughout the period of use as it has
the right to direct how and for what purpose the truck is used, i.e., whether or when it is used and what it is used for
throughout the period of use. The contractual limitations are meant to protect the interest of Vahan Chalak and hence are
protective rights. RISHI Limited has the right to direct the use of the asset as prescribed under Ind AS 116.

7.
McKinsey Recommendation
factor
Shared 1. Clear mission, vision and values are to be determined according to the existing requirements. In doing so
values all stakeholder groups should be identified, as well as theirparticular needs and performance expectations.
2. Senior management must constantly re-iterate the importance of values and beliefs to employees.
3. Innovation and creativeness are encouraged e.g. rewardsfor change, calculated risk-taking.
Strategies 1. RISI Limited's core strategy spins around providing high- quality, affordable healthcare. This strategy has
led to a flat fee structure.
2. There's an emerging need to cater to newer generations willing to pay a premium.
3. Alternative fee structures can create new opportunities and in so doing acquire potential new clients.
4. Improve the competitive position e.g. Creation of alliances and partnerships and business requirements
analysis.
5. Requirement for a revamped strategy in forming alliances and collaborations.
6. Should strive towards a greater market share buy venturing to other states.
7. Strategies should be responsive to changes in market dynamics.
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 Skills 1. The organization has made significant investments in training and development.
2. By introducing gender diversity programs, the company can retain its talented female professionals.
3. Performance measurement criteria should be reassessed in light of the relevant business environment.
4. Appraisal must be done more engaging and according to a disciplined approach – rather than a form filling
exercise.
5. Perhaps reward system and job enrichment and enlargement should be considered to provide growth
opportunities.
Systems 1. Silo approach breed inefficiencies. Integration of departmental systems and main system decision making
at organisation level is key for real time data analysis and improved decision making.
2. Integration of systems will free up resources which can be mobilised in other functions.
3. The Company should quickly analyse the benefits that would accrue to the Company from the latest
systems. It should also consider the underlying risk such as accuracy and reliability of results generated
from these systems.
Structures 1. The organization functions with a multi-divisional framework, which is segregated into Strategic Business
Units (SBUs).
2. A core process view of organisation should be carried out to align objective of entity with the SBUs.
3. Move from silo approach to an integrated structure where common functions are shared between SBUs.
4. Provide a basis where authorities and responsibilities are identified that is consistent.
Style 1. Current management style relies on a conventional method for performance evaluations (appraisals).
2. Data and information driven organisation should be promoted.
3. Continuous improvement based on valid measurement of regular processes and services should be
promoted.
Should continue to leverage technology.
Staff 1. Gender ratio at middle and top level should be improved.
2. Establish enablers to reduce exit of female professionals e.g. crèche facilities.
3. Connect with alumni are not limited to a meeting exercise; but should be leveraged to identify potential
boomerang employees.

CASE STUDY 41
Established as a public sector undertaking (PSU) of Government of India, Bharat Chemicals Pharma Ltd. (BCPL) has served as
a cornerstone of the Indian pharmaceutical industry sinceits inception. Headquartered in Kolar, Karnataka, India, BCPL
plays a pivotal role in manufacturing high-purity chemicals crucial for various pharmaceutical applications.
BCPL takes immense pride in its unwavering commitment to quality. Their state-of-the-art manufacturing facilities are equipped
with advanced technology and machinery. Stringent quality control measures are implemented throughout the production
process, ensuring every batch of chemicals meets the highest standards of purity and consistency. This dedication to quality has
not only positioned BCPL as a trusted supplier within the domestic market but has also garnered them recognition as a reliable
source for pharmaceutical chemicals on theinternational stage.
Understanding the critical nature of their products for the pharmaceutical industry, BCPL prioritizes meeting the specific requirements
of their clientele. They offer a comprehensive range of chemicals specifically tailored for pharmaceutical applications. These
chemicals encompass a diverse spectrum, including active pharmaceutical ingredients (APIs), excipients, and solvents, all crucial for the
safe and effective production of life-saving medications.

Looking ahead, BCPL is dedicated to continuous innovation and technological advancements. They actively invest in research
and development to refine their manufacturing processes and explore the creation of new, high-purity chemicals catering to the
evolving needs of the pharmaceutical industry. Furthermore, BCPL recognizes its social responsibility and strives to implement
sustainable practices throughout its operations. Their commitment to a cleaner environment and responsible manufacturing
processes ensures a brighter future for the communities they serve.
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As part of its business expansion strategy, BCPL is in process of setting up a pharma intermediates business which is at
very initial stage. For this purpose, BCPL has acquired on 18th April, 2023, 100% shares of BMD Ltd. (BMDL) that manufactures
pharma intermediates. The purchase consideration for the same was by way of a share exchange valued at Rs 70 crores. The
fair value of BMDL's net assets was Rs 30 crores, but does not include:

(i) A patent owned by BMDL for an established successful intermediate drug that has a remaining life of 16 years. A
consultant has estimated the value of this patent to be Rs 20 crores. However, the outcome of clinical trials for the same
are awaited. If the trials are successful, the value of the drug would fetch the estimated Rs 30 crores.
(ii) BMDL has developed and patented a new drug which has been approved for clinical use. The cost of developing the drug
was Rs 24 crores. Based on early assessment of its sales success, valuer has estimated its market value at Rs 40 crores.
(iii) BMDL's manufacturing facilities have received a favourable inspection by a government department. As a result of this, the
Company has been granted an exclusive ten-year license to manufacture and distribute a new vaccine. Although the license
has no direct cost to the Company, its directors believe that obtaining the license is a valuable asset which assures
guaranteed sales and the value for the same is estimated at Rs 20 crores.
After acquisition of BMDL, BCPL made a gross profit of Rs 100 crores and incurred Indirect Expenses of Rs 40 crores.
The market related details are as follows:

Risk Free Rate of Return 4.5%

Market Rate of Return 12%
β of the Company BCPL 0.9.
Number of issued Equity Shares 10 crores
In connection with assessment proceedings under GST, the proper officer issued summons to the senior management official of
BCPL, Mr. Raj, after recording a brief of the proceedings in the case file and submitting the same to the officer who had
authorized the issuance of such summons in the year 2023-2024.
The assessment order demanded payment of GST of Rs 20 crores along with interest against which BCPL went for appellate
proceedings under GST. The company gets the order in its favour on 15th April, 2024, which resulted into reducing the tax
liability as on 31st March, 2024. The financial statements for 2023-24 were approved by the board of directors on 15th May, 2024.
The management has not considered the effect of the transaction as the event is favourable to the company. The company’s
view is that favourable events after the reporting period should not be considered as it would hamper the realisation concept
of accounting.
RK & Associates, an audit firm, has been entrusted with the task of auditing the IT department of BCPL. Mr. Rajesh Das, the
engagement partner, will be leading the audit on behalf of RK & Associates. A checklist was handed over to him, which contained
many questions such as,
 Are separate user names and passwords assigned to individual users?
 Are periodical changes of passwords ensured?
 Are external (offsite) data backups maintained at a place outside the premises?
Mr. Das assembled his audit team with the necessary expertise in IT auditing, then developed a detailed audit plan, outlining the
specific procedures to be performed, the timeline for the audit, and the resources required. Mr. Das explained to his team that in an
automated environment, the data stored and processed in systems can be used to get various insights into the way business
operates. This data can be useful for preparation of Management Information System (MIS) reports and electronic dashboards that give
a high-level snapshot of business performance. Accordingly, the controls over the IT system of the company are very crucial.
While auditing BCPL's IT department, Mr. Das stumbles upon an intriguing detail. He discovers information regarding a new
pharma project recently commissioned near Bengaluru. This project, marked by new technology and a hefty price tag of Rs 1000
crores, has apparently experienced delays and cost overruns.
This information, though relevant to BCPL's overall operations, falls outside the specific scope of Mr. Das's assigned task - auditing
the IT department
For the aforesaid project, BCPL imported machine from US through a vessel named ‘Last Sails’. The events relating to its entry
into India and the discharge and onward movement and storage of are as follows.
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 24th June Vessel entered the Indian territorial waters
25th June Import manifest was delivered to the customs authorities
27th June XML Ltd filed bill of entry for the goods
29th June Entry inwards granted to the vessel
The rate of customs duty on such machinery was increased from 7% to 9% on 28th June. The details of such import ransaction
are as follows:
S. No. Particulars Amount
1 Cost of the machine at the factory of the exporter US$ 40,000
2 Transport charges from the factory of exporter to the port forshipment US$ 2,000

3 Handling charges paid for loading the machine in the ship US$ 200
4 Buying commission paid by the importer US$ 200
5 Freight charges from exporting country to India US$ 4,000
6 Actual insurance charges paid are not ascertainable ---
7 Charges for design and engineering work undertaken for themachine in US US$ 10,000
8 Unloading and handling charges paid at the place ofimportation Rs 3,000
9 Transport charges from Mumbai to Karwar port Rs 50,000
10 Exchange rate to be considered:1$ = Rs 80
I. Multiple Choice Questions
1. What is a key factor contributing to BCPL's strategic positioning within the pharmaceutical industry?
(a) Lack of innovation in manufacturing processes (b) Stringent quality control measures

(b) Limited range of chemical products (d) Reliance solely on domestic market

2. Choose the correct statement with respect to issue of summons to Mr. Raj by the proper officer?

(a) The officer issuing summons to Mr. Raj should have submitted a report to the officer who had authorized the
issuance of such summons and not just a recording a brief of the proceedings in the case file. Further, summons
to Mr. Raj should not have been issued at the first instance.

(b) Summons to Mr. Raj should have been issued at the first instance. Mr. Raj should have been summoned whether
or not there are indications in the investigation of his involvement in the decision making process which has led to
loss of revenue.

(c) Summons to Mr. Raj should not have been issued at the first instance. Mr. Raj should have been summoned only
when there are indications in the investigation of his involvement in the decision making process which has led
to loss of revenue.
(d) Summons to Mr. Raj should not have been issued at the first instance. However, Mr. Raj can be summoned whether
or not there are indications in the investigation of his involvement in the decision making process which has led to
loss of revenue

3. Choose the correct option relating to the receipt of the order under GST in the favour of the company?

(a) Such event is an adjusting event providing evidence of a condition existing at the end of the reporting period.
Further, such event though favourable needs to be considered as per the relevant Ind AS.
(b) Such event is a non-adjusting event indicative of conditions that arose after the reporting period. So, the question of
considering such event does not arise at all whether it is favourable or unfavourable.
(c) Such event is an adjusting event providing evidence of a condition existing at the end of the reporting period.
However, as such event is favourable is not required to be considered as per the relevant Ind AS.
(d) Such event is a non-adjusting event indicative of conditions that arose after the reporting period and also, as it is a
favourable event need not to be considered even though it would have been an adjusting event.

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4. How does BCPL demonstrate its commitment to sustainable practices in line with its strategic positioning?
(a) By overlooking social responsibility in its operations
(b) Through heavy reliance on harmful manufacturing processes
(c) By investing in research and development for technological advancements
(d) By implementing sustainable practices and ensuring environmental responsibility

5. Referring above, which date would be considered for determining the rate of customs duty payable by BCPL and at what
rate it should be payable?
(a) 29th June, customs duty payable @ 9% (b) 27th June, customs duty payable @ 7%

(c) 29th June, customs duty payable @ 7% (d) 27th June, customs duty payable @ 9%
6. Explain the accounting treatment in respect of the transactions with respect to acquisition of BMDL by BPCL under
applicable Ind AS.

7. Being entrusted with the task of auditing the IT department of BCPL, Mr. Rajesh Das, the engagement partner, will be
leading the audit on behalf of RK & Associates. Which type of audit of IT department of BCPL is being conducted by Mr.
Rajesh? Also distinguish such audit from other audit types by providing reasons for the same.

8. Determine the assessable value of the machinery imported by BCPL

ANSWERS TO THE CASE STUDY 41

1. (b) Stringent quality control measures

Reason: BCPL's strategic positioning within the pharmaceutical industry is significantly influenced by its commitment
to maintaining stringent quality control measures throughout its manufacturing processes. This dedication ensures
that every batch of chemicals produced meets the highest standards of purity and consistency, crucial for
pharmaceutical applications. By consistently delivering high-quality products, BCPL has established itself as a
trusted supplier within both the domestic and international pharmaceutical markets. This strategic emphasis on
quality control not only enhances the company's reputation but also differentiates it from competitors and reinforces its
position as a reliable sourcefor pharmaceutical chemicals.

2. (c) Summons to Mr. Raj should not have been issued at the first instance. Mr. Raj should have been summoned only when
there are indications in the investigation of his involvement in the decision making process which has led to loss of revenue.
Reason: The Central Board of Indirect taxes and Customs (CBIC) in the Department of Revenue, Ministry of
Finance has issued guidelines from time to time to ensure that summons provisions are not misused in the field.
Some of the important highlights of these guidelines, inter-alia, are given below:
- in all cases, where summons is issued, the officer issuing summons should submit a report or should record
a brief of the proceedings in the case file and submit the same to the officer who had authorized the
issuance of summons;
- senior management officials such as CEO, CFO, General Managers of a large companies or a Public Sector
Undertakings should not generally be issued summons at the first instance. They should be summoned only
when there are indications in the investigation of their involvement in the decision making process which has
led to loss of revenue.
Here, the proper officer issued summons to the senior management official of PSU, Mr. Raj, after recording a
brief of the proceedings in the case file and submitting the same to the officer who had authorized the issuance
of such summons.
3. (a) Such event is an adjusting event providing evidence of a condition existing at the end of the reporting period.
Further, such event though favourable needs tobe considered as per the relevant Ind AS.

Reason: As per Ind AS 10, even favourable events need to be considered. What is important is whether a condition
exists as at the end of the reporting period and there is evidence for the same making it is an adjusting event.

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 Here, BCPL went under appellate proceedings under GST. The company got the order in its favour on 15th April,
2024, which resulted into reducing the tax liability as on 31st March, 2024. The financial statements for 2023-24
were approved by the board of directors on 15th May, 2024. The order was received before approval of financial
statements of 2023-2024.

Accordingly, such event is an adjusting event providing evidence of a condition existing at the end of the reporting
period. Further, such event though favourable needs to be considered as per the relevant Ind AS.

4. (d) By implementing sustainable practices and ensuring environmental responsibility.

5. (a) 29th June, customs duty payable @ 9%

Reason: As per Section 15 of the Customs Act, 29th June would be considered for determining the rate of customs
duty payable by BCPL and the rate of duty will be 9%, because the bill of entry is deemed to have been filed on
the date of entry inward though it was actually filed before the rate of duty increased.

6. As per para 13 of Ind AS 103 ‘Business Combination’, the acquirer's application of the recognition principle and conditions
may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities
in its financial statements. This may be the case when the asset is developed by the entity internally and charged the
related costs to expense.
Based on the above, the company can recognise following intangible assets while determining Goodwill / Gain on
Bargain Purchase for the transaction:
applicable criteria includes industry regulations, internal IT policies, and data security best practices.
Here's a breakdown of the reasons why a compliance audit is the most suitable option:
Focus on IT Controls: The checklist provided to Mr. Das includes questions about user access controls, password
management, and data backups. These elements areall crucial for ensuring compliance with data security regulations
and best practices.
Management Information Systems (MIS): Mr. Das emphasizes the importance of controls over IT systems due to the
valuable data they store and their role in generating MIS reports. Compliance audits often assess an organization's
adherence to data privacy regulations and information security standards.

Distinguishing from Other Audit Types

Comprehensive Audit: This is a broader assessment encompassing all aspects of an organization that whether the
undertakings have fulfilled the objectives for which they have been established, whether value-for-money spent has been
obtained, whether the targets have been achieved, etc. While a compliance audit might be part of a comprehensive
audit, the scenario doesn't suggest such a wide-ranging scope.
Propriety Audit: This type of audit is directed towards an examination of management decisions in sales, purchases,
contracts, etc. to see whether these have been taken in the best interests of the undertaking and conform to accepted
principles of financial propriety. While IT security breaches could have legal implications, the scenario seems more
focused on adherence to established IT controls and regulations.
Financial Audit: This audit primarily assesses the accuracy and fairness of an organization's financial statements. The
information provided doesn't indicate a focus on financial transactions or accounting records, which are central to a
financial audit.

Conclusion
Considering the emphasis on IT controls, data security, and adhering to relevant criteria, a compliance audit is the most
likely type of audit being conducted by RK & Associates on BCPL's IT department. Mr. Das's focus on user access,
password management, and data backups aligns perfectly with the objectives of a compliance audit in the IT domain.

7. Computation of assessable value of imported machinery

Particulars Amount (US$)
Price of the machine at the factory of the exporter 40,000
Add: Transport charges up to the port in the country of theexporter [Note 1] 2,000

81
 Handling charges at the port in the country of the exporter[Note 1] 200
Charges for design and engineering work undertaken for themachine in US [Note 2] 10,000
Buying commission [Note 3] Nil
FOB value 52,200
Add: Freight charges up to India 4,000
Insurance charges @ 1.125% of FOB [Note 4] 587.25
Transport charges from Mumbai to Karwar port [Note 5] Nil
CIF value 56,787.25
Add: Unloading and handling charges paid at the place ofimportation [Note 6] Nil
Assessable value 56,787.25
Assessable value in Indian rupees @ Rs 80/ per $ 45,42,980

Notes:
(1) The cost of transport, loading, unloading and handling charges associated with the delivery of the imported goods
to the place of importation are includible in the assessable value [Rule 10(2)(a) of the Customs Valuation
(Determination of Value of Imported Goods) Rules, 2007 (CVR)].
(2) Design and engineering work undertaken elsewhere than in India and necessary for the production of the imported
goods is includible in the assessable value [Rule 10(1)(b)(iv) of the CVR].
(3) Buying commission is not included in the assessable value [Rule 10(1)(a)(i) of the CVR].
(4) If insurance cost is not ascertainable, the same shall be added @ 1.125% of FOB value of the goods [Third
proviso to rule 10(2) of the CVR].
(5) Cost of insurance, transport, loading, unloading, handling charges associated with transshipment of imported goods
to another customs station in India is not included in the assessable value [Sixth proviso to rule 10(2) of the CVR].
(6) As per rule 10(2) of the CVR, only charges incurred for delivery of goods “to” the place of importation are includible
in the transaction value.
The loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation
are not to be added to the CIF value of the goods.

CASE STUDY 42
Bound by the strong ties of friendship since childhood, Kushal Dabhoi, Raj Varia, and Kishan Kaneja had their paths diverge after
graduation. Raj and Kishan, both armed with their shiny new MBA degrees in Finance, decided to join forces and embark on a
business venture. Their shared passion for commerce and international trade led them to establish M/s. RK Enterprises, a
partnership firm specializing in the wholesale and export of various goods. Their firm thrived, becoming a successful player in the
market, thanks to their combined expertise in finance and their unwavering dedication.
Meanwhile, Kushal, who had always been fascinated by the intricacies of accounting and finance, pursued a different path. He
diligently applied himself to his studies and emerged victorious, clearing the prestigious Chartered Accountancy exam in May
2023. This accomplishment marked the beginning of a promising career for Kushal. He leveraged his newly acquired qualifications to
establish a Nidhi company.
Driven by a desire to give back to society, Kushal didn't stop there. He also co-founded a charitable trust alongside his brother.
This trust focused on social causes close to their hearts, aiming to make a positive impact on their community.
Last year, the firm exported a shipment of goods to a buyer in Japan. These goods were covered by a warranty, which was
essentially functionality for a specific period. During the current financial year, a situation arose where the Japanese buyer
encountered some issues with the exported goods. As these issues fell within the warranty period, the buyer exercised their
rights and returns the goods to the firm for repairs.
The firm reports a net profit of Rs 60,00,000 before deduction of the following items:
(1) Salary of each partner Rs 1,00,000 per month payable to two working partners of the firm (as authorized by the deed of
partnership).
(2) Depreciation on plant and machinery under section 32 (Computed) Rs 5,00,000.
(3) Interest on capital @15% per annum (as per the deed of partnership). The amount of capital eligible for interest Rs
10,00,000.
The firm filed the ITR of A.Y. 2024-25. The following are the particulars furnished for A.Y. 2024-25:

82
 Particulars of total income Rs
As per the return of income furnished u/s 139(1) 50,00,000
Determined under section 143(1)(a) 60,00,000
Assessed under section 143(3) 75,00,000
Reassessed under section 147 95,00,000
Tax audit u/s 44AB of the Income-tax Act, 1961 of the firm was conducted by CA Rajdeep who has received the audit fees of Rs
1,00,000 on progressive basis for the same for the year ended 31.03.2024. The audit report was, however, signed on 22.05.2024.
CA Kushal thought of setting up a finance business. He discussed his thought process with his Raj and Kishan and decided to start
a Nidhi company as this was the most easy and affordable way to start a loan business in India which required only seven
members with easy documentation. No approval, whatsoever, was also required from Reserve Bank of India as in the case of
other finance companies. Further, the Nidhi company would be able to accept deposits from members and lend to them as well,
besides earning periodical interests on loans while its main expenditure would be to pay interests on deposits and establishment
charges, etc.
CA Kushal with his other trusted friends, including Raj and Kishan, incorporated a Nidhi company under the name Bhagya Nidhi
Ltd., on 28th June, 2023, at Udaipur (Rajasthan). It was duly notified as Nidhi in the Official Gazette. It was mentioned in the
Memorandum that as Nidhi, the company would cultivate the habit of thrift and savings amongst its members, receive deposits
from and lend to, its members only, for their mutual benefit and it shall comply with Nidhi Rules, 2014.
The authorised capital of the company was Rs 1,00,00,000 divided into 10,00,000 equity shares of Rs 10 each and the issued,
subscribed and paid-up share capital was Rs 95,00,000 (9,50,000 equity shares of Rs 10 each). Keeping in view the sufficiency
of profits, the company declared a dividend of Rs 1 per share for the F.Y. 2023-24.
At the same time, CA Kushal and his brother established the 'Bhagya Sugam Charitable Trust' under section 12AB of the Income-
tax Act, 1961. This trust is dedicated to charitable activities and is managed by his brother. The trust's name, 'Bhagya Sugam,'
reflects its mission of facilitating a smooth and fortunate journey for those it serves.
The trust provides the following information relating to supply of its services during the first quarter of its establishment:
Rs
Renting of residential dwelling for use as a residence to Mr. Nisarg, an 15,00,000
unregistered person
Renting of rooms for devotees (Charges per day Rs 800) 7,00,000
Renting of kalyanamandapam (Charges per day Rs15,000) 11,00,000
Renting of community halls and open space (Charges per day Rs 8,000) 9,00,000
Renting of shops for business (Charges per month Rs 9,000) 6,00,000
Renting of shops for business (Charges per month Rs 11,000) 8,00,000
I. Multiple Choice Questions
1. Assuming that the underreporting of income is not on account of misreporting and none of the additions or disallowances
made in assessment qualifies u/s 270A(6), penalty leviable on M/s. RK Enterprises u/s 270A at the time of assessment
would be:
(a) Rs 3,12,000 (b) Rs 1,56,000 (c) Rs 4,68,000 (d) Rs 2,34,000
2. Assuming that the underreporting of income is on account of misreporting, penalty leviable on M/s. RK Enterprises under
section 270A at the time of reassessment would be:
(a) Rs 3,12,000 (b)Rs 2,34,000 (c) Rs 12,48,000 (d) Rs 6,24,000
3. Which of the following category of technological advancement best describe installing passbook update kiosk at branch
(a) Automation (b) Extension (c) Transformation (d) Revolution
4. Bhagya Nidhi Ltd. declared a dividend of Rs one per share. What is the maximum amount of dividend it is permitted to
declare ? Choose the correct option from those given below:
(a) Since Bhagya Nidhi Ltd. has declared maximum permitted dividend of Re. one per share, it cannot declare
dividend in excess of Rs one per share.
(b) Bhagya Nidhi Ltd. can declare maximum permitted dividend of Rs two per share.
(c) Bhagya Nidhi Ltd. can declare maximum permitted dividend of Rs two and fifty paise per share.
(d) Bhagya Nidhi Ltd. can declare maximum permitted dividend of Rs three per share.
83
5. Which of the following conditions are to be satisfied by M/s. RK Enterprises to avail exemption on goods re-
imported for repairs?
(i) M/s. RK Enterprises, at the time of importation, executes a bond.
(ii) Goods must be re-exported within 6 months or 1 year (if time is extended) of the date of re-importation.
(iii) In case goods are not repaired, new goods are to be sent by M/s. RK Enterprises, within 6 months
Choose the most appropriate option.
(a) (i) and (iii) (b) (i), (ii) and (iii) (c) (ii) and (iii) (d) (i) and (ii)
6. Compute:
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Allowable working partner salary for the A.Y. 2024-25 as per section 40(b).
7. Referring to the above case study, comment on receipt of audit fees by CA Rajdeep on progressive basis from the firm.
8. , Compute the GST liability of Bhagya Sugam Charitable Trust for the first quarter assuming that the above amounts are
exclusive of GST and rate of GST, wherever applicable, is 18%.
Note: The rooms/ Kalyanamandapam/ halls/ open space/ shops owned by the trust are located within the precincts of a
religious place, meant for general public, owned by the trust.

ANSWERS TO THE CASE STUDY 4 2

1. (d) Rs 2,34,000
Reason: As per section 270A(3) of the Income-tax Act, 1961, under-reportedincome would be
Assessed income (-) Income determined under section 143(1)(a) i.e. Rs 75,00,000 – Rs 60,00,000 = Rs 15,00,000
As per section 270A(7) of the Income-tax Act, 1961, penalty in case of under reporting of income would be 50% of
tax payable on underreported income = 50% of Rs 4,68,000 [(Rs 15,00,000×30%)+4%] = Rs 2,34,000
2. (c) Rs 12,48,000
Reason: As per section 270A(3) of the Income-tax Act, 1961, under-reported income would be
Income reassessed or recomputed (-) Income assessed in a preceding order i.e. Rs 95,00,000 – Rs 75,00,000 =
Rs 20,00,000
As per section 270A(8) of the Income-tax Act, 1961, penalty in case where under reporting of income results from
misreporting of income by any person would be 200% of tax payable on such underreported income = 200% of Rs
6,24,000 [(Rs 20,00,000×30%)+4%] = Rs 12,48,000
3. (a) Automation
Reason: Change in business model on account of technological advancements can be classified into automation,
extension or transformation. Automation is the use of technologies for performing any function or process digitally
which was earlier performed by humans. Installing passbook updation kiosk is automation.
4. (c) Bhagya Nidhi Ltd. can declare maximum permitted dividend of Rs two and fifty paise per share.
Reason: As per Rule 18 of the Nidhi Rules, 2014:
A Nidhi shall not declare dividend exceeding twenty five per cent in a financial year.
The issued, subscribed and paid-up share capital of Bhagya Nidhi Ltd. was Rs 95,00,000 (9,50,000 equity
shares of Rs 10 each) and so, it can declare maximum permitted dividend of Rs two and fifty paise per share (Rs
10 × 25%) .
5. (d) (i) and (ii)
Reason: As per Notification No.158/95 Cus. dated 14.11.1995 as amended vide Notification No. 60/2018 Cus dated
11.09.2018:
Goods manufactured in India and reimported for repairs or for reconditioning other than the specified goods:
(a) Goods must be re-exported within six months (extendable till one year) of the date of re-importation
(b) The Assistant Commissioner/Deputy Commissioner of Customs is satisfied as regards identity of the goods.
(c) The importer at the time of importation executes a bond Accordingly, (i) and (ii) are correct

84
6. (i) As per Explanation 3 to section 40(b), ―book profit‖ shall mean the net profit as per the profit and loss account for the
relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of
the remuneration paid or payable to the partners of the firm if the same has been already deducted while computing
the net profit.
In the present case, the net profit given is before deduction of depreciation on plant and machinery, interest on
capital of partners and salary to the working partners. Therefore, the book profit shall be as follows:

Computation of Book Profit of the firm under section 40(b)

Particulars Rs Rs
Net Profit (before deduction of depreciation, salaryand 60,00,000
interest)
Less: Depreciation under section 32 5,00,000
Interest @ 12% p.a. [being the maximum 1,20,000 (6,20,000)
interest allowable as per section 40(b)] (Rs
10,00,000 × 12%)
Book Profit 53,80,000
(ii) Salary actually paid to working partners = Rs 1,00,000 × 2 × 12 = Rs 24,00,000. As per the provisions of section
40(b)(v), the salary paid to the working partners is allowed subject to the following limits –
On the first Rs 3,00,000 of book profit or Rs 1,50,000 or 90% of book
in case of loss profit,whichever is more
On the balance of book profit 60% of the balance book profit
Therefore, the maximum allowable working partners ‘salary for the A.Y. 2024-25in this case would be:
Particulars Rs
On the first Rs 3,00,000 of book profit [(Rs 1,50,000 or 90% of 2,70,000
Rs 3,00,000) whichever is more]
On the balance of book profit [60% of (Rs 53,80,000 - Rs 3,00,000)] 30,48,000
Maximum allowable partners salary 33,18,000
Hence, allowable working partners salary for the A.Y. 2024-25 as per the provisions of section 40(b)(v) is Rs
24,00,000, being lower than the maximum allowable salary.
7. As per Chapter X of Council General Guidelines, 2008 a member of the Institute in practice or a partner of a firm in practice
or a firm shall not accept appointment as auditor of a concern while indebted to the concern or given any guarantee or
provided any security in connection with the indebtedness of any third person to the concern, for limits fixed in the statute and
in other cases for amount exceeding Rs 1,00,000/-.
However, the Research Committee of the ICAI has expressed the opinion that where in accordance with the terms of
engagement of auditor by a client, the auditor recovers his fees on a progressive basis as and when a part of the work is
done without waiting for the completion of the whole job, he cannot be said to be indebted to the company at any stage.
Conclusion: In the instant case, CA Rajdeep is appointed to conduct a tax audit u/s 44AB of the Income Tax Act, 1961. He
has received the audit fees of Rs 1,00,000 in respect of the tax audit for the year ended 31.3.2024 which is on progressive
basis. Therefore, Mr. D will not be held guilty for misconduct.
8. Renting of precincts of a religious place meant for general public, owned/managed by, inter alia, an entity registered as a
charitable trust under section 12AA/12AB of the Income-tax Act are exempt from GST vide exemption notification. However,
said exemption is not available if:
(i) charges for rented rooms are Rs 1,000 per day or more;
(ii) charges for rented community halls, Kalyan mandapam, open area are Rs 10,000 per day or more;
(iii) charges for rented shops are Rs 10,000 per month or more.
Further, services by way of renting of residential dwelling for use as residence to an unregistered person are also
exempt vide exemption notification.
Computation of GST liability of Bhagya Sugam Charitable Trust for Quarter 1
85
 Value (Rs) GST @18% (Rs)
Particulars
Renting of residential dwelling for use as a residence toMr. Nisarg, an 15,00,000 Nil
unregistered person [Exempt vide exemption notification]
Renting of rooms for devotees (Charges per day Rs 800) 7,00,000 Nil
[Exempt since charges per day are below Rs1,000]
Renting of kalyanamandapam (Charges per day Rs 15,000) 11,00,000 1,98,000
[Taxable since charges per day exceed Rs10,000]
Renting of community halls and open space (Charges perday Rs 8,000) 9,00,000 Nil
[Taxable since charges per day exceed Rs10,000]
Renting of shops for business (Charges per month Rs 9,000) 6,00,000 Nil
[Exempt since charges per month are below Rs10,000]
Renting of shops for business (Charges per month Rs 11,000) 8,00,000 1,44,000
[Taxable since charges per month exceed Rs 10,000]
Total 3,42,000

CASE STUDY 43
Home Décor Limited operate the brand WallKraft – the country’s largest maker of home furnishing items. The Company is the
partners of choice for premier home furnishing products around the country. It has evolved beyond wallpapers to provide a whole
range of decor categories including bed and bath, blinds, curtains and rugs. The brand enjoys a leadership position in its
category, with a strong retail presence throughout the country and with a wide network of multi-brand outlets and e-commerce
platform. The production facilities are exemplary in embracing technology and the spirit of re-invention. The Company is listed in
the National Stock exchange.
Wallpaper is one of their premium products and is an intricate manufacturing process, involving various phases. A typical paper roll of
65 inch and 6,707 m long is cut into six sub-rolls, each about 21 inch wide and 3,048 m long. Then the reverse side of the wallpaper is
coated with PVC (vinyl), with thickness depending on the strippability and durability of paper under production. Next, the paper is
sent for surface printing process. In surface printing, impregnated metal rollers with a rubber pattern are used. These are mounted
on a single machine. Ink is applied to the surface roller. The ink lays in the rubber pattern sitting above the surface of the
roller. Ink is then pressed on to the paper by the roller. Upon successful printing of the wallpaper, it is rolled with a wet cornstarch
or wheat starch-based coating. Then it is dried thoroughly before packaging. Residential-use wallpapers are cut down into rolls of
15 yards or 13.71 meters. Commercial-use rolls are packaged in 30, 45 and 60 yards rolls. A run number, printed label, and
hanging instructions are placed against each roll before storing them in a warehouse, where they await the final shipment. The
entire production process consumes 20,000 litres of water every day. A large quantity of waste is generated everyday which is
dumped in a landfill near the residential complex of its workers.
It is clear from the business strategies that the major purpose behind its functioning is to generate profits and all efforts are
focused on doing just that. However, the Company stated witnessing a reduction in the key performance indicators like profits,
revenue, margins, loss of customers, increase in customer complaints and growing employee dissatisfaction. The Company
engaged an external consultation to advise them for continuing leadership position. The consultant advised that the ideology of
the Company does not take into consideration the impact its operations have on the environment and the people around. The
idea should be that a company is managed in such a way that not only generates the desired profits but also improves people's
lives and the well-being of the planet.
The consultant proposed a complete overhaul of the Company’s manufacturing process and advised that the Company should
commit to measuring their social and environmental impact— in addition to their financial performance—rather than solely
focusing on generating profit, or the standard “bottom line”. A summary of the observations/ recommendations of the consultant
using Triple Bottomline theory is as follows.

86
Profit
The Company’s success most heavily depends on its financial performance, or the profit it generates for shareholders. The
Company follows Ind AS for the preparing the financial statements under Companies Act, 2013. Strategic planning initiatives and
key business decisions are generally carefully designed to maximize profits while reducing costs and mitigating risk. Now, leading
company have discovered that they have the power to use their businesses to effect positive change in the world without
hampering financial performance. In many cases, adopting sustainability initiatives has proven to drive business success.

People
Traditionally, the Company have favoured shareholder value as an indicator of success, meaning they strive to generate value for
those who own shares of the company. As many companies increasingly embrace sustainability, they’ve shifted their focus toward
creating value for all stakeholders impacted by business decisions, including shareholders, customers, employees, and
community members.
Some simple ways companies can make an impact on people—and serve future generations— include ensuring fair hiring practices
and encouraging volunteerism in the workplace. They can also look externally to effect change on a larger scale. For instance, many
organizations have formed successful strategic partnerships with nonprofit organizations that share a common purpose.

Planet
While businesses have historically been the greatest contributors to climate change, they also hold the keys to driving positive
change. The Company should recognize their social responsibility to do so. This effort isn’t solely on the shoulders of the
country’s largest corporations—virtually all businesses have opportunities to make changes that reduce their carbon footprint.
Adjustments like using ethically sourced materials, cutting down on energy consumption, and streamlining shipping practices are
steps in the right direction toward long- term sustainability.
Basis the above suggestions the CFO decided to make the following changes:
1. At present the Company donate to PM CARE Fund for development for socio-economic development and relief of the Scheduled
Castes, the Scheduled Tribes while fulfilling its CSR obligations under the Companies Act, 2013. In addition to donation of the
Fund, the Company should allocate a significant portion of the CSR resources to advance human rights and fight poverty
and hunger.
2. Commit to 100% organic cotton products. Urge suppliers to help in the development and implementation of greening the supply
chain.
3. Employees can leave their jobs for up to two months with continued salary pay and benefits, to intern at an environmental
organization of their choice.
4. Removal of unnecessary packaging materials thereby leading saving of 12 tons of packaging materials from ending up in
the garbage, while at the same time saving the company INR 15 crores annually.
5. Presently, extended producer responsibility norms do not require the Company to recycle products that have reached the end of
its life in a sustainable manner. These norms voluntarily be extended to cover discarded materials ending at landfill.

During the year, a search under section 132 of the Income-tax Act, 1961 was initiated in the business premises of Home Decore
Ltd. and cash of INR 89 crores was found in the locker.

On the basis of the findings of the Investigation wing, Assessing Officer issued show cause notice to the Home Décor Limited to
justify the cash identified during the search and seizure. In response, Home Décor Limited submitted the details along with few sample
invoices relating to sale of old and discarded assets. The Assessing Officer observed that Home Décor Limited did not furnish
ledger account of these parties, copies of the agreement, copies of supporting documents, standard operating procedure adopted
for sale of old discarded assets and email address of the responsible persons. Therefore, Assessing Officer was of the view that there
was substantive evidence that the Company have undisclosed income of INR 89 crores.
The Assessing Officer also asked the latest financial statements of the Company. A summary of key financial information of
the Company are as follows:
INR crores

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 Profit and Loss Balance sheet
3 Months FY 20X3 –FY 30 June 31 March
ended 30 20X4 20X4 20X3
June 20X4
Revenue 100 893 Non-current assets 900 1,000
Expenses 80 160 Current assets 800 100
Profit after tax 20 733 Surplus 320 300
Reserves 300 580
Total liabilities 1,080 220
The statutory auditor of the Company is of the view that revenue qualifies as a Key Audit Matter as prescribed in SA 701. Accordingly,
following paragraph relating to Key Audit Matter is proposed in the audit report.
Key audit matters are those matters that, in our professional judgment, were of important to the users of the financial statements. These
matters were addressed in the context of forming a separate opinion on these matters. For each matter below, our description of
how our audit addressed thematter is provided in that context

Important matters How our audit addressed the key auditmatter

Revenue recognition We have performed the following procedures:
The Company derives significant portion of its revenue from ▪ We assessed the appropriateness of the revenue
sale of home furnishing items. Revenue is recognised when the recognition accounting policies by comparing with
seller of goods has transferred to the buyer the property in the applicable accountingstandards.
goods for a price or all significant risks and rewards of ▪ We evaluated the design, tested the
ownership have been transferred tothe buyer and the seller implementation and operating effectiveness of key
retains no effective control of the goods transferred to a internal controls including general IT controls and key
degree usually associated with ownership; and no significant IT application controls over recognition of revenue.
uncertainty exists regarding the amount of the consideration that ▪ Performed substantive testing byselecting samples
will be derived from the sale of the goods.. of revenue transactions recorded during the year by
The Company considers whether there are other promises in testing the underlying documents which included
the contract that are separate performance obligations to invoices, good dispatch notes, customer acceptances
which a portion of the transaction price needs to be allocated and shipping documents (as applicable).
(e.g., warranties, customer loyalty points). During the current
▪ We carried out analytical procedures on revenue
year the Company has recognised revenue of INR 100
recognised during the year to identify unusual
crores on account of retrospective price increase which have
variances.
notbeen specifically stated in the financial statements due
to its sensitivities. ▪ We tested, on a sample basis, specific revenue
transactions recorded before and after the financial
Revenue is a critical measure of financial performance that
year end date to determine whether the revenue had
reveals how well a company can generate money from its
been recognised in the appropriate financial period.
businesses and includes exercise of significant judgement such
as determination of transaction price and recognition of ▪ We tested manual journal entries postedto revenue to
variable consideration. identify unusual items
Accordingly, revenue recognition is consideredas a Key Audit
Matter.
I. Multiple Choice Questions
1: The CFO observed that the usage of Triple Bottomline theory would require significant automation. Choose the most
appropriate automation process to deal with repetitive tasks?
(a) Optical Character Recognition (b) Robotic Process Automation (c) Cloud computing (d) Enterprise Resource Planning
2. While preparing the financial statements for the year, the management disclosed previous year’s income from sale of looms
as an exceptional item in the current year. Management’s contention was that since amount is very significant and also
relate to previous year the transaction would qualify as an exceptional item. Do you agree with the contention of the
management?
(a) No. previous year’s unrecognised income should have been presented as Other Operating Revenue in the
Statement of Profit and Loss.
(b) No. previous year’s unrecognised income cannot be disclosed as an exceptional item of the current year due to a

88
 specific prohibition under Ind AS 1.
(c) No. previous year’s unrecognised income should have been presented as Other Income in the Statement of Profit
and Loss.
(d) No. previous year’s unrecognised income represents a prior period error and should be recognised in respective
periods by restating the comparative information in accordance with Ind AS 8.
3. Pursuant to restatement of comparative information, the auditor is of the view that a material weakness exists in internal
controls with reference to financial statements. Accordingly, the audit opinion of the current year on internal controls should
be modified. Do you agree with the auditor’s conclusion?
(a) Yes –Restatement of comparative information is a strong indicator of material weakness.
(b) Yes– Any lapse in internal controls relating to inventory and revenue is a material weakness.
(c) No – Since accounting treatment as prescribed under Ind AS have been done.
(d) No – Since lapses in internal control relate to previous years; audit opinion is onthe current years internal
controls and not previous year.
4. Whether the amount of undisclosed income should be reported by the auditor as fraud under CARO 2020?
(a) No. Since CARO 2020 require reporting of fraud committed on the Company by employees.
(b) No. Search and seizure operation has been carried under the provisions of the Income Tax Act, 1961 and hence
cannot be reported under the requirements of the Companies Act, 2013.
(c) Yes. Undisclosed income is a fraud since it involve the use of deception to obtain an illegal advantage. Paragraph
3(xi)(a) of CARO 2020 requires reporting of material frauds committed on the Company.
(d) Yes. Undisclosed income is a fraud since it injures the interest of the Company. Paragraph 3(ix)(a) of CARO 2020
requires reporting of all frauds committed onthe Company.
5. If during the search proceedings, the Company admits the undisclosed income of INR 89 crores and also provides necessary
explanation on how such income is derived and pays necessary amount of tax together with interest and furnishes the return
of income declaring such undisclosed income, how much penalty would be leviable in such case?.
(a) No penalty would be leviable. (b) Penalty @10% of undisclosed income.
(c) Penalty @30% of undisclosed income. (d) Penalty @50% of undisclosed income.

6. Are the Key Audit matters in accordance with SA 701. Give reasons
7. How can the CFO’s suggestions be categorized according to TBL framework? Also give justification

ANSWERS TO THE CASE STUDY 43

1. (b) Robotic Process Automation
Reason: Robotic Process Automation (RPA) uses software “robots” to automate high-volume repetitive tasks,
freeing up human for more valuable work and strategic work.
2. (d) No. previous year’s unrecognised income represents a prior period error and should be recognised in respective
periods by restating the comparative information in accordance with Ind AS 8.

Reason: As per para 5 of Ind AS 8

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior
periods arising from a failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were approved for issue; and
(b) could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud.
Further, para 42 of Ind AS 8 states that subject to paragraph 43, an entity shall correct material prior period errors
89
 retrospectively in the first set of financial statements approved for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities
and equity for the earliest prior period presented.
3. (a) Yes –Restatement of comparative information is a strong indicator of material weakness.
Reason: Guidance Note on ICFR: Each of the following is an indicator of a control deficiency that should be regarded as
at least a significant deficiency and a strong indicator of a material weakness in internal control:
Restatement of previously issued financial statements to reflect the correction of a material misstatement. (The
correction of a misstatement includes misstatements due to error or fraud; it does not include restatements to
reflect a change in accounting principle to comply with a new accounting principle or a voluntary change from one
generally accepted accounting principle to another generally accepted accounting principle.)
4. (c) Yes. Undisclosed income is a fraud since it involve the use of deception to obtain an illegal advantage. Paragraph
3(xi)(a) of CARO 2020 requires reporting of material frauds committed on the Company.
Reason: Paragraph 3(xi)(a) of CARO requires the auditor to report whether any fraud has been noticed or reported
either on the company or by the company during the year and is not limited to frauds by the officers or employees
of the company. The definition of fraud as per SA 240 and the explanation of fraud as per section 447 of the
Companies Act, 2013 are similar, except that under section 447 of the Act, fraud includes ‘acts with an intent to
injure the interests of the company or its shareholders or its creditors or any other person, whether or not there is
any wrongful gain or wrongful loss.’
5. (c) Penalty @30% of undisclosed income.
Reason: Under section 271AAB(1A) of Income-tax Act, 1961 – penalty of 30% of the undisclosed income is levied

6. The above paragraph on Key Audit Matters is not appropriate due to the following reasons:
Observations Reasons
The description of opening paragraph on Key Audit Under SA 701, Key audit matters are:
Matters is incorrect on account of the following: Those matters that, in the auditor’s professional
Described as matters of importance to the users of the judgment, were of most significance in the audit of the
financial statements. financial statements of the current period.
Forming a separate opinion on these Addressed in the context of the audit of the financial
matters statements as a whole, and in forming the auditor’s opinion
thereon, and the auditor does not provide a separate
opinion on these matters
Observations Reasons
Heading of the table incorrect The auditor should include a separate section under the
heading “Key Audit Matters”
Reference to where the matter is disclosed in the financial The description of key audit matters is not a mere
statements not provided reiteration of what is disclosed in the financial statements.
A reference to any related disclosures enables intended
users to further understand how management has
addressed the matter in preparing the financial statements.
Description of policy of revenue recognition is incorrect Under Ind AS 115 revenue is recognised at the point in time
and not in accordance with Ind AS 115. when control of the asset is transferred, instead of
recognising of revenue on transfer of risk & rewards.
Control of an asset refers to the ability to direct the use of,
and obtain substantially all of the remaining benefits from,
the asset. Control includes the ability to prevent other
entities from directing the use of, and obtaining the benefits
from, an asset.

90
 Recognition of revenue due to price increase has not been Original information is any information about the entity that
disclosed publicly. Key Audit matter cannot be provided on has not otherwise been made publicly available by the
information that is not made publicly available by the entity. Such information is the responsibility of the entity’s
entity. However, the auditor may consider it necessary to management and those charged with governance.
include additional information to explain why the matter
was considered to be one of most significance in the audit
and therefore determined to be a key audit matter, and
how the matter was addressed in the audit, provided that
disclosure of such information is not precluded by law or
regulation.
Observations Reasons
All audit procedures (instead of relevantprocedures) described
Aspects of the auditor’s response or approach that were
most relevant to the matter or specific to the assessed risk
of material misstatement should be stated. Listing of all
procedures is not required.
7.
Suggestion Category
CSR Social equity bottom line
▪ An organization integrating CSR into their businessstrategy is good for business.
Use of organic cotton Environmental bottom line
▪ There are many environmental benefits such as non- usage of pesticides and chemicals
would positively impact the soil condition thereby improving production, saving of
natural resources especially water.
Intern at environmental Environmental bottom line
organisation ▪ This offers Company’s employees the opportunity to explore, learn, and actively participate
in combating environmental issues, including conventional cotton.
Removal of unnecessary Economic bottom line
packaging materials ▪ Making changes that are advantageous for the environment is turning out to be
economically beneficial for the Company.
Extended producer Environmental bottom line
responsibility. ▪ Affects ecological surroundings

CASE STUDY 44
Established in 1971 in Siliguri, West Bengal, HotSip Limited stands as a distinguished Indian company renowned for its expertise
in the marketing and retailing of specialty tea products nationwide. With a rich history spanning over several decades, HotSip has
emerged as a premier destination for tea enthusiasts seeking high-quality and unique blends.
At the heart of HotSip's operations lies its extensive workforce, comprising approximately 182,000 employees dedicated to
delivering exceptional customer experiences. These employees are deployed across a vast network of 19,767 company-operated
and licensed stores strategically located across the country. This widespread presence underscores HotSip's commitment to
accessibility and customer convenience, ensuring that its diverse range of specialty teas are readily available to consumers
across various regions.
Their product mix includes handcrafted high-quality/ premium priced tea, a variety of fresh food items and other beverages.
They also sell a variety of tea products and license their trademarks through other channels such as licensed stores and grocery.
As a listed entity, the Company adheres to stringent financial reporting standards, particularly those outlined in the Indian
Accounting Standards (Ind AS). These standards serve as the guiding framework forthe preparation and presentation of
the Company's financial statements, ensuring transparency, comparability, and accuracy in financial reporting.
By following Ind AS, the Company upholds a commitment to best practices in accounting and financial disclosure, aligning its
reporting practices with internationally recognized norms and standards. This not only enhances the credibility and reliability of
the Company's financial statements but also instills confidence among investors, stakeholders, and regulatory authorities.
The core competence of HotSip has been its ability to effectively leverage their cornerstone product differentiation strategies by
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offering a premium product mix of high quality tea and snacks. HotSip’s brand equity is built on selling the finest quality tea and
related products, and by providing each customer a unique “HotSip Experience”, which is derived from supreme customer
service, clean and well-maintained stores that reflect the culture of the communities in which they operate, thereby building a
high degree of customer loyalty with a cult following.
HotSip Limited primarily operates and competes in the retail tea and snacks store industry. This industry experienced a major
slowdown in the recent past due to the advent of COVID 19 and changing consumer tastes, with the industry revenue declining
6.6% to INR 1,800 crores. Before this, the industry had a decade of growth consistent. Due to the economic disruptions,
consumers spent less on luxuries like eating out, choosing to purchase low-price items instead of high-priced tea drinks due to
shrinking budgets. The industry grew at a low annualized average growth rate of 0.9% from 20X1 till 20X3 with current industry
revenues at INR 1,900
crores. The industry is now forecasted to grow at an annualized rate of 3.9% over the next five years, with a potential to reach
INR 3,000 crores revenues. This growth would be mainly driven by an improving economy, increase in consumer confidence
and expanding menu offerings within the industry. HotSip dominates the industry with a market share of 46.7%, DrinkTea Brand
with 24.6% and other competitors like Donald’s tea, HomeTea, etc. taking the rest.

This industry is in a mature stage with a medium level concentration. HotSip and DrinkTea make up more than 60% of the
market share, giving them considerable market power in determining industry trends. The industry’s demand for premium tea and
snack products are mainly driven by a number of factors which include disposable income, per capita tea consumption,
attitudes towards health, world pricing of tea and demographics. This industry is highly sensitive to the macroeconomic factors
that affect the growth in household disposable. During the economic disruption, the decline in household disposable income due
to increased unemployment and stagnant wages, caused a downward pressure on the revenue and profitability margins in the
industry. Another crucial factor for analyzing the demand in the industry is the per capita tea consumption where the increase in
tea consumption increases the revenue of team and snack shops. The main driver of this consumption increase would be the
increase disposable income, as the economy improves, and consumers start to relax their budgets. This driver has a positive
effect on market revenue. Per capita tea consumption is expected to increase in 20X4.
As tea leaves are the primary input in the value chain of the industry participants, the prevailing volatile prices of tea leaves
determines market costs and profitability margins. The world price of tea has risen sharply in recent years due to growing demand
in other countries and the resulting supply shortages. During the next five years, tea leaves prices are projected to decrease,
which will likely translate into lower market costs and higher profitability. Attitudes towards health also play an important role in
determining the demand in the industry. There is an expected shift towards healthy eating and diet among the consumers in
2014, and this could be a potential threat to the industry as they become more aware of issues related to weight and obesity.
There has been a proactive shift among the industry participants to tailor their menus towards more organic and healthy
products mix.
HotSip Limited is planning to engage a firm as a consultant to analyse the retail tea and snacks industry using Porter’s five
forces. HotSip Limited, a company specializing in beverages, is in the process of considering hiring an external consulting firm to
conduct a thorough examination of the retail tea and snacks industry. The purpose of this analysis is to gain valuable insights into
the competitive dynamics and market forces shaping the industry landscape. Specifically, HotSip Limited aims to leverage
Porter's renowned five forces framework as a systematic approach to assess the industry's competitiveness and identify key
factors influencing its profitability and sustainability. This strategic initiative reflects HotSip
Limited's commitment to informed decision-making and proactive management of its business operations within the dynamic
and evolving retail tea and snacks sector.
HotSip Limited, a prominent player in the beverage industry, embarked on a strategic journey to bolster its brand presence in the
Southern state of Kerala. Recognizing the potential of this market and the need for a comprehensive approach to expansion,
HotSip formulated plans to merge one of its subsidiary companies, HotBrew Limited. For HotBrew Limited, the merger provides a
pathway to enhanced resources and market access through its affiliation with HotSip. As a subsidiary of HotSip, HotBrew stands
to benefit from the parent company's scale, expertise, and brand reputation, positioning it for accelerated growth and market
leadership in the competitive beverage industry. By keeping stakeholders informed and engaged throughout the process, HotSip
can foster trust and confidence in its strategic direction, laying the foundation for long-term success and value [Link]
merger proposal was carefully crafted in adherence to the regulatory framework outlined in the Companies Act of 2013, which
provides a structured mechanism for corporate mergers and acquisitions in India. Under this scheme, HotBrew Limited, with its
distinct portfolio and operations, would be seamlessly integrated into the parent company, HotSip Limited. HotBrew Limited
boasted a significant amount of internally generated intangible assets that were still in the developmental phase. These assets,

92
 ranging from proprietary recipes to brand concepts, represented valuable intellectual property critical to the company's long-term
success. However, as per the proposed merger scheme, it was determined that these intangible assets would be written off
by debiting reserves and surplus of HotSip post-merger.
The Company has a centralised treasury department that arranges funds for all the requirements of the company including
funds for working capital and expansion programs. During the year ended 31st March 2024, the company added further cost while
constructing Plant 1 (out of general borrowings) and started construction of Plant 2 (out of specific borrowing). Both Plant 1
and Plat 2 are under construction. HotSip incurred interest of INR 15 lakhs (including interest on specific borrowing of INR 5
lakhs) during the previous year 2023-
24. Total assets (other than those funded out of specific borrowings) at the beginning of the year were INR 500 lakhs and at the
end of the year were INR 800 lakhs. Other the necessary details are as follows:
INR lakhs
Particulars Plant 1 Plant 2
Balance of capitalised amount at the beginning of the year 20 -
Cost incurred during the P.Y. 2023-24 80 10
Balance of capitalised amount at the end of the year 100 60
I. Multiple Choice Questions
1. The management of HotSip Limited plans to use the analysis from Porters Five Forces in isolation. Select the correct
statement?
(a) No. The analysis is a good starting point, but should not be used in isolation. May be combined with STEEPLE
analysis.
(b) Yes. The analysis is a good starting point, but can be used in isolation. Use of STEEPLE analysis is inappropriate.
(c) No. The analysis is a good starting point, but should not be used in isolation. Use of STEEPLE analysis is
inappropriate.
(d) Yes. The analysis is a good starting point, but can be used in isolation. Use of STEEPLE analysis is appropriate.
2. Following relevant information is available: (INR Lakhs)
HotSip Limited HotBrew Limited
Net profit 80 24
No of equity shares (lakhs) 16 4
Market Value per share (INR) 100 90
HotBrew Limited wants to ensure that earnings available to its shareholders are not reduced post merger. What should
be the exchange ratio in that case?
(a) Exchange ratio of 1:9 (b) Exchange ratio of 6:5 (c) Exchange ratio of 3:1 (d) Exchange ratio of 1:1
3. The Company secretary was drafting the Board Resolutions for the upcoming Board Meeting. It appeared to the Company
Secretary that the merger of HotBrew would qualify as a related party transaction under section 188 of the Companies
Act, 2013 asit would involve transfer of assets and liabilities from a subsidiary company. Should the Company Secretary
draft Board Resolution to ensure compliance with Section 188?
(a) No. Mergers are not covered under Section 188 of the Companies Act, 2013.
(b) Yes. Section 188 of the Companies Act, 2013 covers buying of assets.
(c) No. Transactions in ordinary course of business and on an arm’s length areexcluded from Section 188.
(a) Yes. The Company should also obtain approval of members, if the qualifying conditions are met
4. The Scheme of merger of HotBrew was approved by NCLT after the year end and was filed immediately with the Registrar
of Companies. Which of the following statements would be true?
(a) Account for the merger in the next financial year since the scheme was approved after the year end.
(b) Account for the merger in the current financial year since Board approval is sufficient and rejection by NCLT
is unlikely in case of merger of a subsidiary.
(c) Account for the merger in the next financial year since the scheme would be filed with Registrar of Companies
after the year end.
(d) Account for the merger in the current financial year since the approval of scheme by NCLT is an
adjusting event.
93
5. The auditor of the Company is specifically concerned with the accounting treatment in respect of write off of internally
generated intangible assets. He is in a dilemma whether to modify the audit opinion since the accounting treatment is not in
conformity with Ind AS. On the other hand, it is also widely understood that legal provisions have primacy over the
requirements of Ind AS. What is the correct course of action that auditor should consider in such situation?
(a) He should consider issuing an adverse opinion – since the accounting treatment is not in accordance with Ind AS.
(b) He should give unmodified opinion and include an Emphasis of Matter paragraph in the audit report if the effect
is material.
(c) He should give unmodified opinion (no Emphasis of Matter paragraph) in all cases– since the Schedule III to the
Companies Act, 2013 requires specific disclosures.
(d) He should withdraw from the engagement – as this imposes a significant scope limitation for the auditor.
6. The Finance manager was computing the interest to be capitalised as per ICDS – IX. As per the finance manager,
borrowing cost of INR 1 lakhs and INR 2 lakhs should be capitalised for Plant 1 and Plant 2, respectively. Do you agree?
7. You are required to analyse the retail tea and snacks industry using Porter’s five forces.
ANSWERS TO THE CASE STUDY 44
1. (a) No. The analysis is a good starting point, but should not be used in isolation. May be combined with STEEPLE
analysis.
Reason: Porter’s Five Forces is a good starting point to evaluate an industry but should not be used in isolation.
You could, for example, combine it with a Value Chain Analysis or through the VRIO framework in order to get a
better sense of where your company’s competitive advantage is coming from and to better position your company
among rivals. Moreover, Porter’s Five Forces is often combined with the STEEPLE analysis to give a good
overview of the organization’s environment.
2. (b) Exchange ratio of 1:9

Reason: INR Lakhs

HotSip HotBrew
Current EPS 5 6
(INR 80 lakhs/ 16lakhs shares) (INR 24 lakhs/ 4 lakhs shares)
Exchange ratio - 1.2(6/5)
No of shares to be issued 4,80,000 -
(4 lakhs shares X 1.2 i.e exchange ratio)
Total no of shares of Company 20.80 Lakhs(16 lakhs + 4.80 lakhs) -
EPS after merger 5 -
(INR 104 lakhs [Link] earnings/
20.80 lakhs i.e total no of shares)
3. (a) MCA on17 July 2014 have clarified that:
Reason: Transactions arising out of Compromises, Arrangements and Amalgamations dealt with under
specific provisions of the Companies Act, 1956/Companies Act, 2013, will not attract the requirements of
section 188 of the Companies Act, 2013.
4. (d) Account for the merger in the current financial year since the approval of scheme by NCLT is an adjusting event.
Reason: In the financial statements assets should be recognised when an entity is able to exercise control.
Approval of merger scheme is a substantive condition to demonstrate control. The approval is also a pre-requisite
for giving effect to a scheme of merger in the financial statements of the Company. Approval of Scheme of merger
is accorded after the year-end provide further evidence of conditions existing on the balance sheet date and
would hence to be an adjusting event under Ind AS 10. Accordingly Scheme of merger with HotBrew should be
recognised in the current financial year since HotBrew is already controlled by the Company. Approval of Scheme
by NCLT is an adjusting event and hence should be recognised in the financial statements of the current year.
5. (b) He should give unmodified opinion and include an Emphasis of Matter paragraph in the audit report if the effect
is material.
Reason: In this situation, the departure is not a non-compliance with the accounting framework but compliance with a

94
 modified framework. If the effect of doing this is material, the auditor should describe the resultant deviation from the
framework in sufficient detail in an Emphasis of Matter Paragraph as provided by SA 706:
A4. Appendix 1 identifies SAs that contain specific requirements for the auditor to include Emphasis of Matter paragraphs
in the auditor’s report in certain circumstances. These circumstances include:
 When a financial reporting framework prescribed by law or regulation would be unacceptable but for the fact
that it is prescribed by law or regulation.
6. The Central Government has notified ten Income Computation and Disclosure Standards (ICDSs), to be followed by all
assessees (other than individual or a HUF who is not required to get his accounts of the previous year audited in
accordance with the provisions of Section 44AB of the Income-tax Act, 1961) following the mercantile system of
accounting for the purpose of computation of income under the heads “Profits and gains of business or profession” or
“Income from other sources”.
ICDS IX relating to “Borrowing Cost” provides for capitalisation of borrowing costs in respect of qualifying assets.
Qualifying assets are defined to mean tangible assets, intangible assets and inventories which take atleast 12 months to
become saleable. ICDS IX provides that actual borrowing costs incurred during the period, on funds
borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset, are to be
capitalized on that asset.
In case of general borrowings i.e. not specifically borrowed for acquisition of a particular asset are utilised for
acquisition, construction or production of a qualifying asset then general borrowing cost shall be capitalised in
proportion of the cost of the qualifying asset to total assets of the taxpayer.
ICDS IX provides the formula for capitalisation of general borrowing cost i.e A* x B**/C***
Where: *Borrowing costs incurred during the previous year except on specific borrowing
**Average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the
previous year. In case the qualifying asset does not appear in the balance sheet of a person on the first day, half of the
cost of qualifying asset.
***Average of the amount of total assets as appearing in the balance sheet of a person on the first day and the last day
of the previous year, other than assets to the extent they are directly funded out of specific borrowings.

INR lakhs
Plant 1 Plant 2
(Funded out ofgeneral borrowings) (Funded out ofspecific borrowings
Borrowing cost considered 10 5
Average cost of qualifying asset 60 (20 + 100)/2
Average of the amount of total assets 650(500 + 800)/2
Borrowing cost to be capitalised 0.92 (10x60/650) 5
7. To analyze HotSip Limited in the retail tea and snacks industry using Porter's Five Forces framework, we must
consider the impact of the following competitive forces:

. 1. Threat of New Entrants

Barriers to Entry: High
Economies of Scale: HotSip Limited operates on a large scale with 19,767 stores, creating significant barriers for
new entrants due to the substantial initial investment required.
Brand Loyalty: HotSip enjoys a strong brand presence and a loyal customer base, making it challenging for new
entrants to attract customers.
Capital Requirements: Competing with established players like HotSip necessitates substantial investments in
store setup, marketing, and maintaining quality standards.

2. Bargaining Power of Suppliers

Supplier Concentration: Medium
Key Inputs: Tea leaves are a crucial input, and fluctuations in tea leaf prices can impact profitability. Global tea
demand influences supply and prices.
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 Supplier Power: While there are multiple tea leaf suppliers, global priceincreases due to demand and supply
imbalances give suppliers some leverage. However, an anticipated decrease in tea leaf prices could weaken
supplier power in the future.
Switching Costs: HotSip may face challenges in switching suppliers due to the need to maintain quality standards
and specific blends that align with their brand.

3. Bargaining Power of Buyers

Buyer Concentration: Low
Customer Base: HotSip boasts a large and diverse customer base across various locations, reducing the
bargaining power of individual buyers.
Product Differentiation: High-quality, premium-priced tea offerings and unique customer experiences diminish
buyer power as customers value these distinguishing factors.
Price Sensitivity: During economic downturns, consumers may seek lower-priced alternatives, increasing their
bargaining power. However, as economic conditions improve and disposable incomes rise, buyer power may
decline.

4. Threat of Substitutes
Availability of Substitutes: High
Substitute Products: Various alternatives such as coffee, soft drinks, juices, and low-priced tea options are easily
accessible to consumers.
Switching Costs: Consumers face minimal costs when transitioning to other beverage options, thereby
heightening the threat level.
Consumer Preferences: Shifting consumer preferences towards healthier beverage choices due to health trends
could pose a threat to HotSip if it fails to adjust its product range accordingly.

5. Industry Rivalry
Competitive Intensity: High
Number of Competitors: HotSip faces significant competition from well- established brands like DrinkTea,
Donald’s Tea, and Home Tea.
Market Share: HotSip currently holds a dominant market share of 46.7%, with DrinkTea Brands following at 24.6%.
The rest of the market is divided among other competitors.
Growth Rate: The industry is projected to grow at a rate of 3.9% annually overthe next five years, indicating a
potential increase in rivalry as companies striveto capture more market share.
Product Differentiation: HotSip distinguishes itself by offering high-quality, premium products and unique customer
experiences, although competitors are likely to enhance their offerings as well.

Conclusion
Operating in a competitive landscape marked by high entry barriers, moderate supplier influence, low buyer power, significant
threat of substitutes, and fierce rivalry, HotSip Limited must maintain its competitive edge. This can be achieved by capitalizing
on its strong brand, expansive network, top-notch product range, adapting to evolving consumer preferences, and exploring
strategic partnerships.

CASE STUDY 45
Indian Watches Private Ltd. (IWPL) manufactures smart watches. IWPL had a turnover of over Rs560 crores in the preceding
financial year. It had outstanding loans or borrowings from banks upto Rs 80 crores in the preceding financial year. The paid
up capital of the company is Rs 20 crores.
Smart watches require a number of electronic components likes sensors, semi conductors, touch screen, batteries etc. Each
smart watch requires many types of these components in order to be fully functional. The level of obsolescence is high in these
components due to constant technological progress and design changes. Recently, during a management review meeting, the
production manager complained about the delay in assembly line activities. Electronic components from the stores department
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 were not being supplied on time at the assembly line. The store room manager explained that the delay was primarily caused
because of fast obsolescence of components. There has been an inventory pile up of such obsolete components, many of
which were bought in bulk but could not be used in the smart watch as there had been a technological / design change of the
component in the meantime. Over the years, these items have accumulated and have started taking up substantial place within
the storage area for components. Due to this, retrieval of components that are currently usable is taking time and hence the
delay in delivering components to the assembly line.
Production of smart watches happen in large scale and is considered a high volume business. The company is using Total
Productive Maintenance for maintaining and improving its production process. Total production per day is 5,000 watches each
day. The smart watches are manufactured using several automated machines.
One of the processes in assembly uses an automated machine that requires 4 seconds per watch. The machine is operated on
an 8 hour shift basis. In addition during each shift, the machine has a 60 minute break period and a 20 minute clean up period.
Unplanned downtime is on an average 20 minutes for the machine per shift. Out of the 5,000 watches that undergo this assembly
process each day, 95 watches are not assembled properly, so these are considered defective units.
Indian Watches Private Limited (IWPL) has decided to increase its production capacity to 20,000 watches per day. For this purpose, it
imported an equipment from United States of America (USA) for $100,000. The date of entering into contract was April 30, 2024.
The date of actual importation was May 25, 2024. On this date, the price of the equipment increased to $110,000. However, IWPL had
already settled the contract by paying $100,000 to the exporter on April 30, 2024. Post importation, IWPL has further agreed to
pay $20,000 as license fee and service fee for the equipment to the exporter in USA. This is part of the condition for sale.
IWPL imported sensors from Watches Inc. that is based in USA. These sensors as assembled onto the circuit boards of the smart
watches and form a core component of the watch. Watches Inc. holds 4% of the equity share capital of IWPL. Each sensor is
imported at $10 per unit. Subsequently, following IWPL’s plans to increase its production capacity from 5,000 watches to 20,000
watches, it was decided that revised price for each sensor would be $8 per unit. When imports at the reduced price were effected,
the Department rejected the transaction value stating that the price was influenced by the relationship between the said parties. It
completed its assessment based on the earlier import price of $10 per unit of sensor.
Until last year, IWPL was collaborating with OSoft Private Limited (OSPL) for its software requirements that are installed within
the smartwatches. During these interactions, the management at IWPL noticed the talented pool of software engineers, who were able
to provide unique software applications for IWPL. Therefore, after few rounds of negotiation, IWPL recently acquired OSPL for ₹20
crores. The operations of OSPL will continue as before. All the software developed by OSPL will be used exclusively in smartwatches
manufactured by IWPL. These applications that can increase the efficiency and utility of its smart watches. Recently the software
engineering team that integrated with IWPL developed a navigation application that helps the user navigate required routes as well
as suggest alternate routes to avoid traffic. The smartwatch series that included this navigation application saw a spurt in sales due
to this feature, giving IWPL a competitive advantage over its rivals.
I. Multiple Choice Questions
1. Which of the following techniques may be useful in resolving the problem of delay in delivery of components from the
store to the assembly line?
(a) Economic order quantity (b) 5S methodology (c) Just in Time production (d) Cellular Manufacturing
2. By improving the process for timely availability of the electronic components to the assembly line, which of the
components of Overall Equipment Effectiveness (OEE) is impacted?
(a) Availability of Machine (b) Performance of Machine (c) Quality Losses (d) Cost of machine
3. Which of the following will hold true for IWPL as per the provisions of Companies Act, 2013?
(i) By the Articles of Association, IWPL can appoint its founder Mr. Lal as itsManaging Director for life.
(ii) IWPL has to have a Whole Time Company Secretary since it has a paid-up share capital of 20 crore rupees.
(iii) IWPL has to appoint is required to appoint an Internal Auditor and mandatorily conduct an internal audit.
(iv) IWPL is required to appoint Independent Directors on their Board with the view to boost the level of corporate
governance.
Options
(a) (i), (ii) and (iii) (b) (i) and (ii) (c) (ii) and (iii) (d) (i), (ii) and (iv)
4. Acquisition of OSPL by IWPL is an example of:
(a) Backward integration (b) Forward integration (c) Horizontal integration (d) Merger
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5. If it is found that the navigation tool incorporated in the smartwatch is not user friendly and too complex to operation.
Which attribute of the Kano Model will the aspect of complexity in usage fall under?
(a) Performance attribute (b) Questionable attribute (c) Threshold attribute (d) Reverse quality
6. (i) Calculate the following:
(a) Availability ratio (b) Performance ratio (c) Quality ratio (d) Overall Equipment Effectiveness (OEE)
(ii) How can OEE be used to improve performance measurement in Total Productive Maintenance (TPM) assessments?
Compare the OEE of this process and equipment with the parameters suggested by to Dal et al (2000), Nakajima
(1998) to determine world class performance and identify the parameter that can be improved.
7. (i) Given the increase in the price of the equipment between the date of contract and the date of actual importation, at what
value should the imported equipment be assessed as per the Customs Act, 1962 and the relevant rules as applicable.
(ii) What should be the treatment of the license and service fee that IWPL has to pay to the exporter post importation?
(iii) With reference to IWPL’s import of sensors from Watches Inc. the import price for each sensor was reduced from $ 10
per unit to $ 8 per unit. The Department completed its assessment based on the original import price of $ 10 per unit
of sensor, citing that the 4% share holding in equity capital by Watches Inc. influenced the price. Is the
Department’s action sustainable in law?

ANSWERS TO THE CASE STUDY 45

1. (b) 5S methodology
Reason: 5S methodology which is a Japanese methodology for Total Productivity Management (TPM) that is used to
improve efficiency and effectiveness of an organization’s workspace. The 5 S can be translated as They can be
translated from the Japanese as “sort”, “set in order”, “shine”, “standardize”, and “sustain”.
EOQ relates to the quantity of inventory a company has to purchase to reduce inventory and storage cost. Just in
time production refers to production of a product only as and when demand is generated by the customer. This will not
help resolve the delay in delivery of components (raw materials for the finished product) from the store to assembly
line. Cellular manufacturing refers to group of machines working in a cluster, operated by a single worker that
will reduce work in progress and defective manufacturing.
2. (b) Performance of Machine.
Reason: Timely availability of the electronic components to the assembly line reduces machine idling and minor
stoppages, two of the “six big losses” while calculating OEE. Reduction of idling and minor stoppage improves
the performance of the machine and thereby the OEE of the machine. Availability of electronic component i.e. raw
material, does not directly impact the availability of the machine nor the quality of the product. Cost of the machine is
not any part of the “six big losses” used to measure Total Productive Maintenance, for which Overall Equipment
Effectiveness (OEE) is calculated.
3. (c) Statements (ii) and (iii) are true for IWPL as per the provisions of Companies Act, 2013.
Reason: Option (i) is wrong Section 196(2) of the Companies Act, 2013 lays down that no company shall appoint or re-
appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time.
Option (ii) is correct Section 203 and Rule 8A requires a private company with paid up share capital of ₹10 crores
or more shall have whole time Company Secretary.
Option (iii) is correct Section 138 of the Companies Act 2013, every private company having a turnover of ₹200 crore
and above during the preceding year or having outstanding loans or borrowings from banks or public financial institutions
exceeding ₹100 crores at any point of time during the preceding financial year has to appoint an internal auditor
and mandatorily conduct an internal audit. IWPL has turnover of ₹560 crores in the preceding year and therefore has to
appoint an internal auditor.
Option (iv) is incorrect as appointment of Independent Directors as per Section 149 applies to listed companies
and other public companies.
4. (a) Backward integration
Reason: Backward integration, OSPL was a supplier of software applications and solutions to IWPL before the
integration. OSPL was part of its upstream supply chain. IWPL acquired its supplier OSPL for ₹20 crores. Hence,
this is an example of backward integration.
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5. (d) Reverse quality
Reason: Reverse quality, where complexity in using the navigation tool leads to dissatisfaction of customers.

6. (i) (a) to (d)

(a) Availability Ratio (Table 1)
[Link]. Particulars For 1 machine per shift
1 Total time available (in minutes) 8 hours * 60 minutes 480
Less Planned downtime in minutes
2 Break in minutes 60
3 Clean up time in minutes 20
4 Planned production time in minutes Step 1 - (Step 2 +Step 3) 400
5 Unplanned downtime (in minutes) 20
6 Available time in minutes Step 4 - Step 5 380
7 Availability ratio per shift (Step 6 / Step 4) 95.00%

(b) Performance Ratio (Table 2)

[Link]. Particulars For 1machine per shift
1 Actual production per day (units) 5000
2 Standard time (seconds) 4
3 Standard time required (minutes) Step 1 * Step 2 / 60 333.33
4 Actual Time taken (minutes) (Refer Step 6 from Table 1) 380
5 Performance Ratio (step 3/step 4 in %) 87.72%
(c) Quality Ratio (Table 3)
Sr. No. Particulars Units
1 Actual Production per day 5,000
2 Defective units per day 95
3 Quality Ratio (Step 1 - Step 2)/Step 1 in % 98.10%

(d) Overall Equipment Efficiency (OEE) = Availability Ratio * Performance Ratio * Quality Ratio
= 95% x 87.72% x 98.10% = 81.75%
(ii) Total Production Maintenance (TPM) study is undertaken improve the efficiency of manufacturing process by minimizing
breakdowns and delays. Calculating Overall Equipment Efficiency (OEE) requires the identification of “six big losses”
• Equipment failure / breakdown
• Set-up adjustments
• Idling and minor stoppages
• Reduced Speed
• Reduced Yield and
• Quality Defects and Rework
The first two losses (breakdown and set up adjustments) determine the availability of equipment, the next two losses
(idling and minor stoppages and reduced speed) determine productivity efficiency and the last two losses ( reduced
yield and quality defects/rework) determine quality losses. Identification of these losses can provide information that can
be used to improve the efficiency of manufacturing process.
Comparing the performance at the assembly line process with the parameters suggested by Dal et al (2000),
Nakajima (1998)

Parameter Suggested benchmark Actual at assembly line

Availability >90% 95.00%
Performance Ratio >95% 87.72%
Quality Ratio >99% 98.1 %
Overall OEE 85% 81.75%
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 The overall OEE of 85% and above is considered world class performance. The actual OEE at the assembly line
process is 81.75%, close to but below the world class performance. As can be seen above, the performance ratio of
87.72% is below the benchmark of 95% and above. The actual time taken is influenced by both planned downtime
and unplanned downtime. The production manager can investigate this further to determine where improvements
can be made.
7. (i) As per section 14 of the Customs Act, 1962, the value of the equipment will be the actual price paid or payable
that is the transaction value for the equipment. In this case, the transaction value will be $100,000 which is the price
of the contract and the amount actually paid by IWPL to the exporter on April 30, 2024. Price
increase between the date of contract and the date of actual importation is therefore irrelevant for the purpose of
valuation under Customers Act, 1962.
(ii) IWPL has agreed to pay the exporter, as a condition for the sale, $20,000 as license and service fee post importation
of the equipment. As per explanation to Rule 10(1), this has to be included in the value of the equipment as this
payment is being made as a condition to sale.
(iii) No, the Department’s action is not sustainable in law. Rule 2(2) of the Customs Valuation (Determination of Value of
Imported Goods) Rules, 2007, inter alia provides that persons shall be deemed to be “related” if one of them directly
or indirectly controls the other. The word control has not been defined under the Rules. As per common parlance,
control is established when one enterprise holds at least 51% of the equity shareholding of the other company.
However, in this case Watches Inc. holds only 4% of the shareholding of the IWPL. So, the two parties cannot be
said to be related. The fact the IWPL decided to expand its operations, leading to increase in bulk imports could be a
reason for the reduction in import price. The burden to prove undervaluation lies with the Revenue. In the absence of
evidence to prove under-valuation, the price declared by IWPL is acceptable.

CASE STUDY 46
Due to increased urbanization, there has been a strong demand for residential housing facilities in various cities in India. Residential
housing construction in each region is largely a fragmented market dominated by local and regional builders. Few builders have a
nationwide presence. Residential construction is segmented by type, that is apartments and condominiums, villas and other types.
Most of the apartments’ construction is aimed at the mid-range income to luxury segment of customers. There are very few players
targeting the low-income customers who are also in need of affordable housing facilities. The need for affordable housing is especially
felt in well-developed cities like Pune, Bangalore, Gurgaon and Ahmedabad that have become urban centers in the last few decades.
Housing facilities catering to the low-income customer segment are generally of poor quality, consequently, are prone to
unfortunate accidents.
Bhartiya3D (B3D) is a company established by Mrs. Sinha, an architect and avid innovator. She has been a seasoned professional
having more than 25 years of experience in the construction industry. She is also an innovator who wishes to harness the power of
technology that can revolutionize the construction industry. “Provide over each head a safe and secure roof, without a huge
debt” is the current vision for her latest project. B3D specializes on building 600 sq. ft to 800 sq. ft single- and two-bedroom
homes using 3D technology. This is a revolutionary innovation in the construction industry. Traditional construction involved
developing a blueprint for the home, then procure men, material and machines to work on the home. Completing a project the
traditional way can take months, up to even more than a year in some cases.
B3D plans to turn this concept on the head, by introducing 3D printing technology for construction. Once the blueprint is
finalized, the 3D construction printer takes over and creates the physical structure by printing out layers of concrete based on
the design and specifications in the blue print. This substantially reduces wastes, errors and time required for construction in addition
to generating better quality output. One housing project can be built within 6 months as compared to a period of 18 months for a
similar project built using traditional construction techniques.
As compared to traditionally built homes, the cost of construction of 3D printed homes are expected to be cheaper. An
advantage of using 3D construction technology is that it reduces the need for construction labourers as many of the processes are
automated. This results in the reduction of construction labour cost by almost 40%. Also, reduction in wastes and errors helps in
managing costs better. B3D is in talks with 3D construction printer manufacturers to procure machines needed for construction.
These are costly machines that require huge initial investment. B3D is considering financing options for procurement of these
machines, currently the loan financing rates are high. Due to limited supply in the face of high demand for prime locations, the
cost of land procurement in these fast-developing urban centres is also high.

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Inflationary pressures on cost of materials, labour and other constructions costs, high financing costs etc. are challenges that B3D
expects to encounter. Hence, generating a quick inventory turnover is critical.
B3D has well qualified engineers and architects who will be working on this project. Since B3D plans to build these 3D homes
across different cities, their expertise will be required at multiple locations. Hence, in order to retain them and motivate them, the
company has offered good remuneration packages to them. For the staff it is a matter of pride to be able to be part of such
innovative projects.
B3D wants construction material such as cement and steel need to be of specific quality. There are limited suppliers who can
provide material of such grade quality. Moreover, B3D’s material requirements form a very small portion of the suppliers’
market. Many times, the lead times for procuring these materials are uncertain. Construction material includes bricks and
glass that are very fragile and difficult to store. These materials are widely available in the market with many suppliers and can
be procured easily on demand. B3D is considering its strategy for inventory management for each of the requirements like
cement, steel, bricks and glass.
B3D targets to achieve low cost of production, less lock in of time and capital for each project. Keeping this in mind, the company
plans to price the houses at a very attractive price of Rs 10 lakhs for a single bedroom flat and Rs 12 lakh for double bedroom flat
in prime locations in urban cities across India. On average, similar traditional homes costs around Rs 15 lacs per single bedroom
flat and Rs 18 lakh for double bedroom flat in the same locality. This will bring a lot of relief for this segment of customers who until
now were dependent on the traditional builders fortheir home shelter needs. B3D targets to make a profit of at least 8% on sale
price per flat. At present, it plans to have a uniform selling prices for single bedroom and double bedroom flats across cities in
order to popularize the projects. However, there is flexibility for B3D to charge according to the exact cost considerations for each
location in each city. Incumbents in the real estate cannot compete at this low range pricing, hence the company expects them
to concentrate their business on the higher end segments for middle income and luxury class segments.
B3D has received the requisite approvals for the projects from town planning and other regulatory authorities. To create
awareness and generate demand among the lower income groups, it plans to advertise its products in vernacular newspapers and
TV channels. This would ensure better reach to the target customer segment. The cost of advertising in these channelsis also
cheaper as compared to other mediums. B3D will have a sales office at each project website, which will handle customer
enquiries and take them on site tours in order to familiarize themselves with this novel building project.
B3D wishes to create traction on its sales quickly in order to capitalize on its revolutionary concept. Hence, B3D has tied up with
Smart Bank Ltd. This is a reputed bank that has a national presence. It has vetted and listed B3D’s project across various cities
as one of its approved projects for which it is willing to provide loans along with assistance with loan processing. This tie-up
gives further credibility in the market for this novel housing project.
Since customers are of the lower income group, the probability of their requirement for loan financing would be higher. Hence
where felt appropriate, the sales team of B3D would encourage customers to approach Smart Bank Ltd. for home loans. Fast
loan processing due to pre-approved tie-up, speeds up fund procurement and the transaction can be completed quickly,
improving churn in sales. Smart Bank Ltd. will also use its digital marketing activities and direct selling agents who will advertise
the availability of home loan facilities through these channels. For each loan that gets approved through this tie-up, B3D gets a
small commission on each transaction. B3D expects at least 85% of the potential customers to utilize the tip-up with Smart
Bank Ltd. to avail loans.
Bhavna, an engineer in the research and development team, has been working on making the construction process more
efficient. Consequently, it can reduce the cost of construction. Given, the spectre of inflationary pressures on cost of operations,
this project is considered to be critical to business and has the support of the senior management at B3D. Required finances
have been approved by the management for this project i.e., efficient 3D construction technology. Project costs are easily
identifiable and quantifiable. Bhavna believes that the cost reductions will exceed the project costs within 36 months of their
implementation. Regulatory testing, health and safety approvals were obtained on June 1, 2022. This removed uncertainties
concerning the project, which was finally completed on April 30, 2023. Costs of Rs 24,00,000 incurred until March 31, 2023
have been recognized as an intangible asset. An offer of Rs 17,00,000 has been received from a third party potential buyer, but
it was rejected by B3D, believes that the project will be a major success and that the B3D has the potential to save Rs
19,00,000 in perpetuity. However, Mrs. Sinha, the head of the research and development team, is concerned about the long
term prospects of the new process. She is of the opinion that competitors would have developed new technologies at some time
which would require to replace the new process within five years. She estimates the present value of future cost savings over
this period to be Rs 18,00,000. After that, she feels there is no certainty about the future.
In order to know the state of art developments in the 3D construction business, B3D engages technical consulting services of
Pathway Consulting GMBH, a consulting company in [Link] December 2023, it had paid Rs 25,00,000 as fees for
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 technical services fees to this company. This was paid to the company’s account in Germany. The accountant engaged at B3D
was new to the job and did not deduct TDS on this payment. B3D paid the relevant TDS in December 2024.
The management of B3D is considering the following capital budgeting report for its first project in Pune. Due to the novel nature of
the project, the management wishes to know the guaranteed return that it would rather accept as compared to a higher but uncertain
return. Accordingly, the capital budgeting analysis has incorporated the certainty equivalent co-efficient of future cash flows.
Total investment in the project in Pune Rs 5 crores. Risk free return 3%
Expected cash flow for the next five years
Year Expected cash flow (Rs ) Certainty Equivalent co-efficient
1 1 crore 0.95
2 2 crores 0.90
3 2 crores 0.85
4 3 crores 0.80
5 2 crores 0.75
In May 2023, B3D enters into a lease with AK Enterprises for a 3D construction printer for the Pune project for a period of 3
years. The contract stipulates that AK Enterprises will perform maintenance of the leased 3D construction printer and receive
consideration for that maintenance service. The contract contains the following fixed prices for the lease and non- lease
component:
Lease component for 3D printer Rs 6,00,000 per annum
Maintenance component for 3D printer Rs 1,00,000 per annum
Total payment made to AK Enterprises Rs 7,00,000 per annum
Assume that the stand-alone prices cannot be readily observed, so B3D makes estimates maximizing the use of observable
information of the lease and non-lease components as follows
Lease component for 3D printer Rs 8,00,000 per annum
Maintenance component for 3D printer Rs 2,00,000 per annum
Total payment made to AK Enterprises Rs 10,00,000 per annum

B3D has not opted for the practical expedient option regarding the lease and non-lease component.
I. Multiple Choice Questions
1. Which type of disruption does the introduction of 3D printing in the real estate sector represent?
(a) Low end disruption (b) New market disruption (c) competitive disruption (d) Generic disruption
2. From the case scenario, which stage of startup is B3D in and what is the value proposition match has it achieved?
(a) Pre-start up stage with problem-market FIT stage (b) Pre-start up stage with problem-solution FIT stage
(c) Start up stage with product-market FIT stage (d) Start up stage with scale-FIT stage
3. B3D is considering its strategy for inventory management. Given the information in the case study about the lead times,
availability of suppliers and negotiating powers with suppliers, which of the following inventory management methodologies can
the company follow for these products?
(a) Just in Time Purchasing for all construction materials like bricks and glass, cement and steel.
(b) Just in Time Production for all construction materials like bricks and glass, cement and steel.
(c) inventory to stock for materials like bricks and glass and Just in Time Production for construction materials like
cement and steel.
(d) Inventory to stock for construction materials like cement and steel while Just inTime purchasing for materials
like bricks and glass.
4. Which of the following is instrumental in B3D’s low cost advantage strategy?
(a) Cost effective inputs (b) Low cost distribution channels (c) Economies of scale (d)Process Innovation and re-engineering
5. The net present value of the project in Pune using the certainty equivalent technique would be:
(a) Rs 3.35 crores (b) Rs 2.60 crores (c) Rs 4.07 crores (d) Rs 5.00 crores
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6. What will be the allocation of consideration paid by B3D for the lease and non-lease component against the contract with
AK Enterprises for 3D printer?
(a) Lease component Rs 6,00,000 per annum and non lease component Rs 1,00,000 per annum
(b) Entire payment of Rs 7,00,000 per annum as lease component as B3D has not opted for practical expedient
regarding the lease and non lease components
(c) Lease component Rs 8,00,000 per annum and non lease component Rs 2,00,000 per annum
(d) Lease component Rs 5,60,000 per annum and non lease component Rs 1,40,000 per annum
7. What would be the implication of non-deduction of TDS in the P.Y. 2023-24 for the fees for technical services of Rs
25,00,000 paid to Pathway Consulting GMBH?
(a) There is no implication of non-deduction of TDS for fees for technical services asit is paid outside India, namely to
Pathway Consulting GMBH account in Germany.
(b) There is no implication of non-deduction of TDS for fees for technical services asit was paid in December 2024.
(c) The fees for technical services will not be allowed as a deductible expenditure for the Assessment Year 2024-25.
(d) The fees for technical services is not subject to the TDS provisions and hence B3D need not have paid the
TDS at all in December 2024.
8. B3D wants to ensure that its business model has a competitive advantage over its rivals. DEVELOP Osterwalder’s Business
Model Canvas to help the management understand the key elements of its business model.
9. ADVISE the appropriate accounting treatment for the research and development costs incurred by Bhavna to make
construction process more efficient that will consequently result in future cost savings.

ANSWERS TO THE CASE STUDY 46

1. (a) Low end disruption.
Reason: B3D is targeting low-income customer segment currently existing in the real estate market by offering them
affordable homes using innovative 3D technology at highly attractive rates that cannot be matched by incumbents.
Hence, it plans to enter the market at the lower priced product segment.
Incumbents due to their inability to compete with the company, are expected to concentrate their business on higher end
segments for middle income and luxury class segments.
Also, disruptive innovation is of two type low end disruption and new market disruption
2. (c) Start up stage with product-market FIT stage
Reason: B3D is in the start up stage with product-market FIT stage. Getting regulator approvals, arranging for operational
requirements in terms of men, machines and money, strategic tie-ups that will help its reach in the market, ongoing research
and development activities to reduce costs of operations. All this indicates a commitment from B3D to get customer
validation for the 3D affordable housing project that it wants to the market. Its offering will be tested in the market through its
first project in Pune, where customer demand is expected to be generated and the value proposition starts generating cash
flow, the company moves to the start – up stage with product-market FIT of its value proposition.
3. (d) Inventory to stock for construction materials like cement and steel while Just in Time purchasing for materials like
bricks and glass.
Reason: Inventory to stock for construction materials like cement and steel. B3D wants the materials to be of specific
quality grade. It also seems from the scenario, that the company may not be able to have sufficient negotiating
power with the suppliers. Also, the lead time for procurement of material is uncertain. Hence, the ideal method would
be the stock these inventories.
Just in Time purchasing will work well where the construction material like bricks and glass are very fragile and
difficult to store. These materials can be procured only when needed in order to avoid loss due to storage due to
their fragility. Loss will be incurred if the inventory is stocked and stored due to their fragility. It isgiven that
These materials are widely available in the market with many suppliers and can be procured easily on demand.
Hence, Just In Time purchasing requirements would be an ideal method for these inventories.
4. (d) Process innovation and re-engineering

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 Reason: Process innovation and re-engineering achieved through the use of 3D printing technology
5. (b) Rs 2.60 crores. Calculation as below

= Rs 92,23,300 + Rs 1,69,66,726 + Rs 1,55,57,408 + Rs 2,13,23,689 + Rs 1,29,39,131

= Rs 7,60,10,356
NPV = DCF – initial investment = Rs 7,60,10,356 - Rs 5,00,00,000 = Rs 2,60,10,356 that is Rs 2.60 crores.
6. (d) Lease component Rs 5,60,000 per annum and non lease component Rs 1,40,000 per annum
Reason: The stand alone price for the lease component represents 80% of the total estimated stand alone prices
[Rs 8,00,000/Rs 10,00,000]. Therefore, B3D allocates the consideration in the contract i.e. Rs 7,00,000 per
annum as follows:

Lease component for 3D printer80% × Rs 7,00,000 per annum Rs 5,60,000 per annum
Maintenance component for 3D printer20% × Rs 7,00,000 per annum Rs 1,40,000 per annum
Total payment made to AK Enterprises Rs 7,00,000 per annum
7. (c) The fees for technical services will not be allowed as a deductible expenditure for the Assessment Year 2024-25
Reason: Under section 40(a)(i), where fees for technical for technical services is paid outside India on which tax is
deductible at source under Chapter XVIIB and such tax has not been deducted, the expense shall be disallowed.
Therefore, the fees for technical service will not be allowed as a deductible expenditure for the
A.Y. 2024-25. However, since tax has been paid in December, 2024, the fees for technical services will be
allowed in A.Y. 2025-26.
8. Osterwalder’s Business Model Canvas comprises of nine elements, wherein four elements pertain to cost (key partners, key
activities, key resources and cost structure). These are connected to the other four elements pertaining to revenue (customer
relationships, channels, customer segments and revenue streams). This link is established through the nineth segment,
value proposition.

Key Partners:
B3D relies on several key partners to support its operations and growth in the construction industry. This includes
suppliers of essential components such as 3D construction printing machines, specialized cement, and steel required
for 3D printers, as well as other construction materials like bricks and glass. Suppliers of construction labour are also
crucial partners in executing projects efficiently.
Furthermore, B3D has formed a strategic tie-up with banks like Smart Bank Ltd. This partnership enhances market reach by
facilitating easier access to financing for potential customers. Additionally, consulting firms providing technical insights on
the latest developments in construction technology play a vital role in B3D's innovation and continuous improvement efforts.

Key Activities:
B3D engages in several key activities to drive its business and innovation in the construction industry. First and foremost,
it meticulously follows advanced construction techniques, coordinating the necessary manpower, materials, and
machinery to complete projects within a swift 6-month timeframe. This efficient project management ensures timely
delivery and customer satisfaction.
Secondly, B3D places a strong emphasis on ensuring that construction materials meet the required specifications and
quality standards necessary to support 3D printing technology. This commitment to quality enhances the durability and
efficiency of its construction processes.
Additionally, B3D invests significantly in research and development activities to maintain a competitive edge. These
efforts focus on innovation in 3D printing technology and construction methodologies, enabling B3D to stay ahead in the
market and continuously improve its offerings.
To facilitate quick inventory turnover and boost sales, B3D employs targeted advertisements and leverages its
strategic partnership with Smart Bank Ltd. This collaboration not only expands its customer reach but also facilitates
easy financing options for potential buyers, thereby accelerating sales and project timelines.

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Moreover, B3D evaluates the creditworthiness of customers interested in outright purchases and actively encourages the
use of home loans through Smart Bank Ltd. This approach ensures that financing solutions are accessible to a broader
customer base, making homeownership more achievable for low-income segments.

Key Resources:
B3D relies on key resources essential for its operations and innovation in the construction sector. At the core of its technological
advancement are 3D construction printers, which enable efficient and precise construction of residential units. These
printers are pivotal in realizing B3D's goal of delivering high-quality, affordable housing using advanced technology.
Another critical resource for B3D is its team of employees specialized in engineering and architecture. These
professionals bring expertise in designing and overseeing the implementation of 3D printing technology in construction
projects. Their skills and knowledge are crucial for maintaining operational excellence and driving continuous
improvement.
In addition to tangible resources like 3D printers and skilled personnel, B3D leverages intangible assets such as patents
and process improvements generated through its research and development activities. These intangible assets not only
protect B3D's innovations but also provide a competitive edge in the market by enhancing efficiency, reducing costs, and
improving the quality of its construction projects.

Value Proposition of B3D:

B3D addresses the pressing customer problem of the lack of good quality, affordable housing facilities in urban cities in India.
By leveraging 3D construction printing technology and other innovative technological solutions, B3D provides secure and
affordable housing facilities, revolutionizing the construction industry and meeting the urgent needs of low-income customers
in these urban centers.

Customer Relationships:
B3D maintains customer relationships by managing a mass customer base through sales offices at each project site. These
offices conduct site tours and handle queries about the novel 3D construction project, ensuring that potential buyers are
well-informed and engaged throughout the purchasing process.

Channels:
B3D utilizes multiple channels to reach its customers effectively. Sales offices are established at each project site to
directly engage with potential buyers. Additionally, B3D leverages its tie-up with Smart Bank Ltd., which publicizes the
projects through digital marketing activities and direct selling agents, ensuring wide reach and visibility among potential
customers.

Customer Segments:
B3D targets lower-income customers in urban cities across India who are in need of affordable housing facilities. The
customer base consists of two types: those making outright purchases and those requiring financial assistance for
home purchases.

Revenue Streams:
B3D's primary revenue stream comes from the sale of residential units, with a uniform selling price of Rs 10 lakh per single
bedroom flat and Rs 12 lakh per double bedroom flat to popularize the scheme. There is flexibility to adjust prices upward
based on cost considerations for each project across multiple cities, with a target profitability of 8% of the sale price of each
flat.
In addition to direct sales revenue, B3D generates ancillary income through commissions from its partnership with Smart Bank
Ltd. This collaboration facilitates loan approvals for customers, enhancing affordability and enabling quicker sales turnover.

This dual revenue model ensures that B3D not only meets the housing needs of lower- income segments but also
maximizes its financial performance through strategic pricing and financial partnerships.

Cost Structure:
B3D's cost structure involves various management opportunities and challenges. On the opportunity side, utilizing 3D
construction technology yields higher quality construction while reducing waste, errors, and time due to automated
processes. This efficiency allows for better inventory management of materials like cement, steel, bricks, and glass, and
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 decreases construction time, lowering labor costs by almost 40% and reducing overhead expenses. However, B3D faces
several challenges, including high land acquisition costs, significant expenses for 3D printing machines, and the need for
higher remuneration for skilled employees such as engineers and architects. Additionally, the specialized materials
required for 3D printing are costly, inflation impacts other construction costs, and financing costs remain high.
9. Ind AS 38 ‘Intangible Assets’ requires an intangible asset to be recognized if, and onlyif, certain criteria are met.
 Intention to complete the asset is apparent as it is a major project with full support from board
 Finance is available as resources are focused on project
 Costs can be reliably measured
 Benefits are expected to exceed costs – (in 3 years)
 Regulatory approval which was received on June 1, 2022
Regulatory approval for the project was received on June 1, 2022. The project was completed on April 30, 2023. Costs of
Rs 24,00,000 incurred until March 31, 2023 have been recognized as an intangible asset. This is incorrect.
Expenses incurred prior to June 1, 2022 should be expensed out: Rs 24,00,000×2/12= Rs 4,00,000. Retrospective
recognition of expense as an asset is not allowed.
Expenses incurred between June 1, 2022 and March 31, 2023 should be capitalized:Rs 24,00,000×10/12= Rs 20,00,000
Ind AS 36 ‘Impairment of assets’ requires an intangible asset not yet available for use to be tested for impairment annually.
As of March 31,2023 the asset is not yet available for use, hence it has to be tested for impairment. Cash flow of Rs
19,00,000 in perpetuity would clearly have a present value in excess of Rs 19,00,000 and hence there would beno
impairment. However, the research head Mrs. Sinha is technically qualified, so impairment tests should be based on her
estimate of a five-year remaining life and so present value of the future cost savings of Rs 18,00,000 should be considered
in that [Link] 18,00,000 is greater than the offer received (fair value less cost to sell) of Rs 17,00,000 and so Rs
18,00,000 should be used as the recoverable amount.
The carrying amount should be consequently reduced to Rs 18,00,000. Calculation of Impairment loss of
intangible asset under development:
Particulars Amount (Rs )
Carrying amount of intangible asset as of March 31,2023 20,00,000
Less Recoverable amount 18,00,000
Impairment loss 2,00,000

Impairment loss of Rs 2,00,000 is to be recognized in the profit and loss for the year 2022-23.
Necessary adjusting entry to correct books of account will be:
Particulars Rs Rs
Operating expenditure – Development expenditure Dr 4,00,000
Operating expenses – Impairment loss Dr 2,00,000
To Intangible asset under development 6,00,000

CASE STUDY 48
Manpower Services Private Limited is a subsidiary of a Singapore based Company. The Company has received a land on lease
for 99 years from the Government to carry out its activities. At the inception of the lease, the land is utilised by the company and a
building has been constructed. As per the terms and conditions of the lease, the Company is supposed to return the land to the
Government after 99 years on a “as it is where it is basis”.
The Company has entered into secondment agreements of employees with group companies located in USA, UK, Dublin,
Singapore etc. Key terms and conditions of the agreement are as follows:
 When required, the Indian Company requests foreign Group companies for managerial and technical personnel to assist in
its business. Accordingly seconded employees are selected by foreign Group company and are transferred to the Indian
Company.
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 During the term of secondment, the seconded employee would act in accordance withthe instructions and directions of
the Indian Company. The seconded employees would devote their entire time and work to Indian Company.
 The seconded employees would continue to be on the payroll of the foreign group company for purpose of continuation of
social security/ retirement benefits, but for all practical purposes, Indian Company would be the employer.
 The seconded employees would receive the salary, bonus, social benefits, out of pocket expenses and other expenses from
foreign group company and the foreign group company would raise debit note on the Indian Company to recover the said
expenses without any mark-up.
The Company is registered with GST authorities under the categories of ‘manpower recruitment agency service’. During an audit, the
GST department contended that the seconded employee cannot be called as employee of Indian Company and there cannot be
any relief from payment of GST under reverse charge. The authorities alleged that the Indian Company has failed to pay GST
under reverse charge for the services of manpower supply received from the foreign group entities. Accordingly, a demand for unpaid
amount of GST, interest and penalty was raised on the Indian Company.
The CFO informed the Board of Directors regarding the above demand. The Board of Directors enquired about the financial position of
the company as of the end of the year to assess the potential implications. Following is the summary of the financial position at
the year-end, prepared as per Accounting Standards issued under Companies (Accounting Standards) Rules, 2021:
INR crores
Profit and Loss Account Balance sheet
Current Previous Current Previous
year year year year
Revenue 50 40 Total assets 900 1,000
Expenses 10 15
Profit after tax 40 25 Equity 400 600
Total liabilities (including third party loan of INR 500 400
10 crores in current year and INR 5 crores in
previous year)

The CFO also mentioned that the financial statements and annual return of the previous year have not yet been filed by the
Company. Basis the above financial information, the CFO note that the Company meet the exemption criteria as available to a
private company and accordingly the Company would be exempted from audit of internal financial control with reference to
financial statements as prescribed under section 143(3)(i) of the Companies Act, 2013. In the Board meeting the CFO also
mentioned that UK is strengthening its data privacy norms thereby significant investment would be required to overhaul the internal
controls for ensuring compliance with the amended data protection norms. Non-compliance would lead to significant punitive damages
on the Company/ directors. The Board decided that considering the cost benefit, it would be prudent to exit the UK jurisdiction.
The Board authorised the Managing Director to initiate the next steps.
The Managing Director also informed the Board that the Company have been hit by a series of cyber security incidents that has
impacted some of its valued stakeholders and their personal information. These cyber incidents resulted in an unauthorised third-
party gaining access to the Company’s data systems. The Company had provided necessary intimations to the Regulatory authorities.
Once aware of the unauthorised access to data, the Company worked urgently to contain the threat and investigated what
occurred. The Company also engaged external cyber security experts to assist with their response to the incident and to ensure
the ongoing safety and security of its systems. It has been identified that only the following types of personal information are likely
to have been extracted by unauthorised third party. Investigations have confirmed that no bank account was included in the
affected files.
[Link] Type of cyber attack Type of information expected to beleaked

Surname Pin code Email Dateof Total

address birth
1 Malware — or malicious software 2 5 1 - 8
— is any program or code that is created with the intent
to do harmto a computer, network or server.
2 Denial-of-Service attack is a malicious, targeted 3 2 20 5 30
attack that floods a network with falserequests in
order to disrupt business operations.
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 3 Phishing is a type of cyberattack that uses email, SMS, 7 - 5 5 17
phone, and social media to entice a victim to share
sensitiveinformation
4 Spoofing is a technique through which a 10 10 - - 20
cybercriminal disguises themselves as a known or
trusted source.
5 Identity-driven attacks - a valid user’s credentials 5 - 1 - 6
have been compromised and an adversary is
masquerading as that user.
6 Supply chain attack - targets a trusted third-party - 2 1 1 4
vendor who offers services or software vital to the
supply chain.
Total 27 19 28 11 85
Further, following general precautionary steps to reduce the risk of harm in future:
Remain alert to increased scam activity or any unsolicited communications via email, SMS or phone.
 Do not click on any suspicious links or provide your passwords or any personal information.
 Consider changing your online account passwords.
I. Multiple Choice Questions
1. The management estimated that INR 10 crores would be incurred at the end of 99 years to dismantle/ demolish the
building and return the land to the Government. Accordingly provision was recognised by adding to the corresponding item
of property, plant and equipment. Is the accounting treatment appropriate?
(a) Yes– Under IND AS 37, provision should not be discounted to its present value.
(b) No– Under IND AS 37, provision for decommissioning, etc that has material effect on the time value of money should
be discounted to its present value.
(c) No– Under IND AS 37, provision for decommissioning, etc should have been recognised as an expense in the
Profit and Loss Account.
(d) Yes– Under IND AS 37, provision should not be discounted to its present value. However, the provision should have
been recognised as an expense in the Profit and Loss Account.
2. The management proposes to appoint the auditor to design and implement financial information system of the Company.
Can the auditor accept such engagement?
(a) No– Since an auditor cannot design and implement financial information systemof any audit client as such service
is prohibited under section 144 of the Companies Act, 2013.
(b) Yes– Since the auditor is prohibited from designing and implementing financial information system of a listed audit
client as provided under section 144 of the Companies Act, 2013.
(c) Yes– Since the auditor of a private limited company is permitted to design (but not implement) financial information system
as provided under section 144 of the Companies Act, 2013.
(d) No. Since the auditor of a private limited company is specifically prohibited under Section 144 to the Companies Act, 2013
to assume a management responsibility.
3. The auditor of the Company has initiated audit planning discussions with the management. The management informed
that the audit of internal control with reference to financial statements is not applicable considering that the Company
meet the exemption criteria provided by MCA for certain private company. The auditor believes that audit of the internal
controls would be required. Do you agree with the auditor?

(a) No. The exemption criteria are met. Non-filing of financial statements is not relevant.
(b) No. The exemption criteria are met. Non-filing of Annual Return is not relevant.
(c) Yes. No exemption has been prescribed under the Companies Act, 2013 inrespect of internal control with reference to
financial statements of private/ public companies.
(d) Yes. The exemption criteria are not met since the Company has committed a default in filing financial statements/
Annual Return.
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4. From the perspective of risk management, the Company is facing risk in UK jurisdiction?
(a) Strategic. (b)Operational (c) Compliance (d) Financial.
5. The Company plans to use Pareto’s analysis. Which of the following statement is the correct description of this concept?
(a) Commonly known as the 80:20 Rule states that for many outcomes, roughly 20% of consequences come from 80%
of causes.
(b) Commonly known as the 80:20 Rule. It is a fixed % Rule.
(c) Commonly known as the 80:20 Rule states that for many outcomes, roughly 80% of consequences come from 20%
of causes.
(d) Commonly known as the 80:20 Rule. It is a detective mechanism and not a control mechanism.
6. Perform Pareto Analysis of total cyber incidents and the type of data leakage using the above and provide
recommendations to the management of the Company.
7. The CFO is unsure whether the secondment arrangement fall under the purview of the Goods and Services Tax Act, 2017
and accordingly whether a provision should be recognised as at the end of the year. Describe the accounting scenarios that
are possible under Ind AS 37 for recognition of the demand?
ANSWERS TO THE CASE STUDY 48
1. (b) No– Under IND AS 37, provision for decommissioning, etc that has material effect on the time value of money should
be discounted to its present value.
Reason: Para 45 of Ind AS 37 States that:
Where the effect of the time value of money is material, the amount of a provision shall be the present value of the
expenditures expected to be required to settlethe obligation.
2. (a) No– Since an auditor cannot design and implement financial information system of any audit client as such service
is prohibited under section 144 of the Companies Act, 2013.
Reason: Section 144 to the Companies Act, 2013 prohibit auditor to directly/ indirectly design and implement
financial information system of a company, its holding or subsidiary company.
3. (d) Yes. The exemption criteria are not met since the Company has committed a default in filing financial statements/
Annual Return.
Reason: Refer MCA notification dated 5 June 2015 which provide that In case of Private Company section
143(3)(i) would not apply to:-
(i) which is a one person company or a small company; or
(ii) which has turnover less than rupees fifty crores as per latest audited financial [statement and] which has
aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the
financial year less than rupees twenty five crore.
The exceptions, modifications and adaptations shall be applicable to a private company which has not committed a
default in filing its financial statements under section 137 of the said Act or annual return under section 92 of the said
Act with the Registrar.
4. (c) Compliance
Reason:Compliance risk is the potential damage businesses face when they fail to comply with industry standards,
laws, and regulations. This risk involves both financial penalties and reputational damage.
5. (c) Commonly known as the 80:20 Rule states that for many outcomes, roughly 80% of consequences come from 20%
of causes.
1. The Pareto Principle is a concept that specifies that 80% of consequences come from 20% of the causes, asserting
an unequal relationship between inputs and outputs. It is not a fixed percentage rule. In a general sense, it means
that a few products/ services can make up most of the value of an entity. Named after economist Vilfredo Pareto, the
Pareto Principle serves as a general reminder that the relationship between inputs and outputs is not balanced. The
Pareto Principle can be applied in a wide range of areas such as manufacturing, management, and human resources.
The Pareto Principle is even more applicable to businesses that are client-service based and has been adopted by a
variety of customer relationship management software programs.
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 In the present case the Denial of Service incidents are the most common cyber incidents encountered by the Company and
represented 35% of the total number of cyber incidents. Spoofing , Denial-of-Service attack and Phishing accounted for
79% of the total cyber attacks. Refer computation below:
Pareto Analysis of total cyber incidents Nos % total Cumulative %
Denial-of-Service attack 30 35 35
Spoofing 20 24 59
Phishing 17 20 79
Malware 8 9 88
Identity-driven attacks 6 7 95
Supply chain attack 4 5 100
Total 85

So these are considered as key incidents and the Company must allocate resources to mitigate these threats. Else, the
Company might face implications and loose reputation in the market.
Further, a second level Pareto analysis reveal that that the email address was the common data that got leaked. Email
address and Surname together accounts for 64% of the type of data leakage. So, the Company must direct its efforts and
develop specific controls to safeguard this information and avoid the data leakage in future.
Pareto Analysis of type of data leakage Nos % total Cumulative %
Email address 28 33 33
Surname 27 32 65
Pincode 19 22 87
Date of birth 11 13 100
Total 85
6. Ind AS 37 applies to the accounting for provisions, contingent liabilities and contingent assets. A provision is recognised when
(a) a present obligation as a result of a past event exists; (b) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If
these conditions are not met, no provision should be recognised. In almost all cases it will be clear whether a past event has
given rise to a present obligation. In rare cases, for example in a legal demand, it may be disputed either whether certain
events have occurred or whether those events result in a present obligation.
Regarding the demand received for GST, the Company should determine whether a present obligation exists at the
balance sheet date by taking account of all available evidence. Further information might become available between the
balance sheet date and the date on which the Company’s financial statements are finalised. Where this happens, that
information should be taken into account in determining whether or not a present obligation exists at the balance sheet
date. For example, the Company should assess whether any clarifications, etc have been issued by the GST department
or any judgements have been passed by Supreme Court which lays down the principal in this regard. To seek more clarity
on this matter the Company may obtain opinion of legal experts and assess the appropriateness of the rational for
reaching the position.
On the basis of the evidence the Company should decide the following regarding the GST demand received:
➢ Where it is more likely than not that a present obligation exists at the balance sheet date: Ind AS does not put a
numerical measure of probability but requires management to assess the likelihood of occurrence basis facts and
circumstances. This implies where the outflow of resources is more likely than not to occur (that is, the probability of
occurring is greater) a provision would be required under Ind AS 37. Accordingly in this scenario, the Company should
recognise a provision (if the recognition criteria are met) for the estimated amount of GST liability.
➢ Where it is more likely that no present obligation exists at the balance sheet date: The Company should disclose a contingent
liability regarding the amount of estimated GST liability, unless the possibility of an outflow of resources embodying economic
benefits is remote.

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