Holding

The Court held that the ICAI must pursue a full inquiry, draw adverse inferences where information is withheld, and that the corporate veil can be lifted to hold foreign MAFs accountable for violations of the CA Act and related statutes.

Summary

The petition challenged the operation of multinational accounting firms (MAFs) in India through Indian chartered accountant firms (ICAFs) that used the same brand name, alleging violations of Sections 25 and 29 of the Chartered Accountants Act, the Companies Act, FDI policy, RBI and FEMA regulations, and the ICAI Code of Conduct. The Supreme Court observed that the ICAI had not completed a full investigation because of incomplete information on foreign remittances and the use of common brand names, and that adverse inference should be drawn where information was withheld. It held that the principle of lifting the corporate veil applies where foreign entities use Indian firms as a façade to evade statutory prohibitions. The Court directed the Union of India to constitute an expert committee to review the statutory framework, the Enforcement Directorate to complete its FEMA investigation, and the ICAI to further examine the matters within three months. The appeal and writ petition were disposed of, with the directions serving as the final order.

Issues considered

Whether MAFs operating in India through Indian CA firms violate Sections 25 and 29 of the Chartered Accountants Act and the Code of Conduct.
Whether foreign remittances and licence/network fee arrangements constitute prohibited foreign investment under the FDI policy and FEMA.
Whether the ICAI has jurisdiction to investigate and discipline the Indian firms and the foreign entities involved.
Whether the corporate veil should be lifted to attribute liability to the foreign MAFs.
Whether a separate oversight mechanism for the auditing profession is required.

Legislation cited

Subjects

Multinational Accounting FirmsICAIForeign Direct InvestmentSection 25Section 29Corporate veilAudit oversightProfessional misconductFEMARBI

Judgment

442 [2018]REPORTS
SUPREME COURT 2 S.C.R. 442 [2018] 2 S.C.R.

A S. SUKUMAR
v.
THE SECRETARY, INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA & ORS.
B (Civil Appeal No. 2422 of 2018 etc.)
FEBRUARY 23, 2018
[ADARSH KUMAR GOEL AND UDAY UMESH LALIT, JJ.]
Chartered Accountants Act, 1949: ss.25, 29 – Allegation that
Multi-National Accounting Firms (MAFs) soliciting professional
C
work in international brand name through registered Indian CA
firms with the same brand name – Illegal operation by MAFs in
India violating s.224 of Companies Act, s.25 and 29 of CA Act,
Foreign Direct Investment policy, Reserve Bank of India Act, Foreign
Exchange Management Act and the Code of Conduct laid down by
D ICAI – Writ petition seeking direction to initiate investigation against
MAFs and Indian Chartered Accountancy Firms (ICAFs) having
arrangement with such MAFs for breach of Code of Professional
Conduct under the CA Act and also seeking penal action by way of
cancellation of permission granted to them by ICAI – Held: The
ICAI does not claim to have conducted complete investigation for
E
want of complete information into the issue whether the Chartered
Accountancy firms by receiving remittances from outside India or
remitting licence fee/network charges outside India have allowed
participation of a company or a foreign entity in the accountancy
business in violation of s.25 of the CA Act and whether use of
F common brand name by the network firms is in violation of
reciprocity stipulated under s.29 of the CA Act – The ICAI ought to
have taken the matter to logical end, by drawing adverse inference,
if information was withheld by the concerned groups – – The
Union of India directed the ICAI to constitute an expert panel to
update its enquiry and to look into the question whether and to
G
what extent the statutory framework to enforce the letter and spirit
of ss.25 and 29 of the CA Act and the statutory Code of Conduct
for the CAs requires revisit so as to appropriately discipline and
regulate MAFs – The Committee may also consider the need for an
appropriate legislation on the pattern of Sarbanes Oxley Act, 2002
H and Dodd Frank Wall Street Reform and Consumer Protection Act,
442
S. SUKUMAR v. THE SECRETARY, INSTITUTE OF 443
CHARTERED ACCOUNTANTS OF INDIA

2010 in US or any other appropriate mechanism for oversight of A
profession of the auditors – Question whether on account of conflict
of interest of auditors with consultants, the auditors’ profession may
need an exclusive oversight body may be examined – The Committee
may examine the Study Group and the Expert Group Reports – It
may also consider steps for effective enforcement of the provisions
B
of the FDI policy and the FEMA Regulations.
Chartered Accountants Act, 1949: ss.25, 29 – Auditing – Role
of auditor – Violation of statutory provisions by MAFs – Need for
separate oversight body – Held: Failure of auditors have resulted
into scandals in the past – Absence of adequate oversight mechanism
results in infringing public interest and rule of law which are part C
of fundamental rights under Arts.14 and 21 – The issue of separate
oversight body for auditing work and updating existing legal
framework is necessary – Therefore, auditing profession requires
proper oversight and such oversight mechanism needs to be revisited
from time to time. D
Chartered Accountants Act, 1949: ss.25, 29 – Illegal
operation by MAFs in India – Lifting of corporate veil – As found
by the Expert Committee in its report, there is a compliance by MAFs
only in form and not in substance, by having got registered
partnership firms with the Indian partners, the real beneficiaries of E
transacting the business of chartered accountancy remain the
companies of the foreign entities – The principle of lifting the
corporate veil has to apply when the law is sought to be circumvented
– Protection of public interest being of paramount importance, if
the corporate personality is to be used to evade obligations imposed
by law, the real state of affairs needs to be seen – The same principle F
applies while overseeing the compliance of applicable ethics of not
permitting profit sharing or complying with the ceiling limit for the
business which is violated by using the technique of sub contracts
for outsourcing – If the premises are same, phone number/fax number
is same, brand name is same, the controlling entity is same, human G
resources are same, it will be difficult to expect that there is full
compliance on mere separate registration of a firm – The prohibition
under s.25 of the CA Act can be held to be defeated.
Administrative law: Expert body – ICAI – Allegation that
members of ICAI lending their names to the MAFs who are non- H
444 SUPREME COURT REPORTS [2018] 2 S.C.R.

A members and enabling them to illegally operate in the field of
Chartered Accountancy and sharing fees and profits with them –
Held: Being an expert body, ICAI should examine the matter further
to uphold the law and give a report to concerned authorities for
appropriate action – Though the Committee analysed available facts
and found that MAFs were involved in violating ethics and law, it
B
took hyper technical view that non availability of complete
information and the groups as such were not amenable to its
disciplinary jurisdiction in absence of registration – A premier
professionals body cannot limit its oversight functions on
technicalities and is expected to play proactive role for upholding
C ethics and values of the profession by going into all connected and
incidental issues – Thus, a case is made out for examination not
only by ED and further examination by the ICAI but also by the
Central Government having regard to the issues of violation of RBI/
FDI policies and the CA Act by secret arrangements – Benami
Transactions – Chartered Accountants Act, 1949 – ss.25, 29.
D
Disposing of the appeal and writ petition, the Court
HELD: 1. It is an undisputed fact that there are remittances
from outside India. The same could be termed as investment
even though the remittances are claimed to be interest free loans
E to partners. The amount could also be for taking over an Indian
chartered accountancy firm. Relationship of partnership firms,
though having Indian partners, operating under a common brand
name from same infrastructure, with foreign entity is not ruled
out. It is not possible to rule out violation of FDI policies, FEMA
Regulations and the CA Act. Thus, appropriate action may have
F to be taken in pending proceedings or initiated at appropriate
forum.The investigation so far carried out cannot be held to be
complete in all respects. The investigation by income tax
authorities is only for assessment of income tax. Action by the
ROC also does not cover the issue raised herein. The
G investigation by the ED is said to be still pending, though several
persons are said to have been examined and documents collected,
which are under scrutiny. The said investigation relates to FEMA
violations. The ICAI has initiated action with regard to foreign
remittances and is said to have written to the RBI to enquire
whether investigation was conducted by the RBI. However,
H according to ICAI, its investigation can only be in respect of
S. SUKUMAR v. THE SECRETARY, INSTITUTE OF 445
CHARTERED ACCOUNTANTS OF INDIA

members, registered with it, for the misconduct conducted by A
them. The ICAI does not claim to have conducted complete
investigation for want of complete information into the issue
whether the chartered accountancy firms by receiving remittances
from outside India or remitting licence fee/network charges
outside India have allowed participation of a company or a foreign
B
entity in the accountancy business in violation of Section 25 of
the CA Act and whether use of common brand name by the
network firms is in violation of reciprocity stipulated under Section
29 of the CA Act. The ICAI should have taken the matter to
logical end, by drawing adverse inference, if information was
withheld by the concerned groups. [Paras 45-46] [493-E-H; 494- C
A-C]
2. No doubt, the report of the committee of experts of ICAI
does not specifically name the MAFs involved, groups A,B,C,D
are mentioned. The ICAI ought to constitute an expert panel to
update its enquiry. Being an expert body, it should examine the D
matter further to uphold the law and give a report to concerned
authorities for appropriate action. Though the Committee
analysed available facts and found that MAFs were involved in
violating ethics and law, it took hyper technical view that non
availability of complete information and the groups as such were
not amenable to its disciplinary jurisdiction in absence of E
registration. A premier professionals body cannot limit its
oversight functions on technicalities and is expected to play
proactive role for upholding ethics and values of the profession
by going into all connected and incidental issues. Thus, a case is
made out for examination not only by ED and further examination F
by the ICAI but also by the Central Government having regard
to the issues of violation of RBI/FDI policies and the CA Act by
secret arrangements. [Paras 47-48] [494-C-F]
3. Profession of auditing is of great importance for the
economy. Financial statements audited by qualified auditors are G
acted upon and failures of the auditors have resulted into scandals
in the past. The auditing profession requires proper oversight.
Such oversight mechanism needs to be revisited from time to
time. Post Enron Anderson Scandal, in the year 2000, Sarbanse
Oxley Act was enacted in U.S. requiring corporate leaders to
personally certify the accuracy of their company’s financials. The H
446 SUPREME COURT REPORTS [2018] 2 S.C.R.

A Act also lays down rules for functioning of audit companies with a
view to prevent the corporate analysts from benefitting at the
cost of public interest. The audit companies were also prohibited
from providing non audit services to companies whose audits
were conducted by such auditors. Absence of adequate oversight
mechanism has the potential of infringing public interest and rule
B
of law which are part of fundamental rights under Articles 14 and
21. The auditing business is required to be separated from the
consultancy business to ensure independence of auditors. The
accounting firms could not be left to self regulate themselves.
[Para 49] [494-G-H; 495-A-B]
C 4. It is for the policy makers to take a call on the issue of
extent to which globalization could be allowed in a particular field
and conditions subject to which the same can be allowed.
Safeguards in the society and economy of the country in the
process are of paramount importance. This Court may not involve
D itself with the policy making but the policy framework can certainly
be looked at to find out whether safeguards for enforcement of
fundamental rights have been duly maintained. In the present
context, having regard to the statutory framework under the CA
Act, current FDI Policy and the RBI Circulars, it may prima facie
appear that there is violation of statutory provisions and policy
E framework effective enforcement of which has to be ensured.
Statutory regulatory provisions intended to advance the object
of law have to be enforced meaningfully. No vested interest can
flout the same by manifesting compliance only in form. Compliance
has to be in substance. The law enforcing agencies are expected
F to see the real situation. As found by the Expert Committee in
its report, there is a compliance by MAFs only in form and not in
substance, by having got registered partnership firms with the
Indian partners, the real beneficiaries of transacting the business
of chartered accountancy remain the companies of the foreign
entities. The partnership firms are merely a face to defy the law.
G The principle of lifting the corporate veil has to apply when the
law is sought to be circumvented. In expanding horizons of modern
jurisprudence, it is certainly permissible. Its frontiers are
unlimited. The horizon of the doctrine is expanding. While the
company is a separate entity, the Court has come to recognize
H several exceptions to this rule. One exception is where corporate
S. SUKUMAR v. THE SECRETARY, INSTITUTE OF 447
CHARTERED ACCOUNTANTS OF INDIA

personality is used as a cloak for fraud or improper conduct or A
for violation of law. Protection of public interest being of
paramount importance, if the corporate personality is to be used
to evade obligations imposed by law, the real state of affairs needs
to be seen. The same principle applies while overseeing the
compliance of applicable ethics of not permitting profit sharing
B
or complying with the ceiling limit for the business which is
violated by using the technique of sub contracts for outsourcing.
If the premises are same, phone number/fax number is same,
brand name is same, the controlling entity is same, human
resources are same, it will be difficult to expect that there is full
compliance on mere separate registration of a firm. The C
prohibition under Section 25 of the CA Act can be held to be
defeated. It is perhaps for this reason that the network firms
avoided giving the information sought by the Committee. The
issue of separate oversight body for auditing work and updating
existing legal framework appear to be necessary. The other aspect
D
is of investment in CA firms, in violation of prohibition of FDI
policy, by using a circuitous route of interest free loans to partners.
The fact that the income tax authorities have taken the grants
received as revenue receipts and taxed the same as such is not
conclusive to hold that the receipt is not an investment which is
impermissible. If investment is not permitted, the policy of law E
cannot be defeated by terming such investment as grant for quality
control specially when the grant has been used to acquire a
chartered accountancy firm. [Paras 50, 51] [495-C-H; 496-A-E]
5. Absence of revisiting and restructuring oversight
mechanism may have adverse effect on the existing chartered F
accountancy profession as a whole on the one hand and unchecked
auditing bodies can adversely affect the economy of the country
on the other. Moreover, companies doing chartered accountancy
business will not have personal or individual accountability which
is required. Persons who are the face may be insignificant and
real owners or beneficiary of prohibited activity may go scot free. G
The Reports of the Study Group and Expert Group show that
enforcement mechanism is not adequate and effective. This
aspect needs to be looked into by experts in the Government. It
may consider whether on the pattern of the Sarbanse Oxley Act
corporate leaders be required to personally certify the accuracy H
448 SUPREME COURT REPORTS [2018] 2 S.C.R.

A of the financial statements. Further, how to prevent corporate
analysts from benefitting from the conflict of interests, how to
check audit companies from providing non audit services and
how to lay down protocol for auditors. Another law in US ‘Dodd-
Frank Wall Street Reform and Consumer Protection Act, 2010’ to
ensure more transparency and accountability of financial
B
institutions to decrease the risk of investing needs consideration.
It sets up an oversight body called the Financial Stability Oversight
Council (FSOC). [Para 52] [496-E-G; 497-A-B]
6. Accordingly, the following directions are issued:
(i) The Union of India may constitute a three member
C
Committee of experts to look into the question whether
and to what extent the statutory framework to enforce the
letter and spirit of Sections 25 and 29 of the CA Act and
the statutory Code of Conduct for the CAs requires revisit
so as to appropriately discipline and regulate MAFs. The
D Committee may also consider the need for an appropriate
legislation on the pattern of Sarbanes Oxley Act, 2002 and
Dodd Frank Wall Street Reform and Consumer Protection
Act, 2010 in US or any other appropriate mechanism for
oversight of profession of the auditors. Question whether
on account of conflict of interest of auditors with
E
consultants, the auditors’ profession may need an
exclusive oversight body may be examined. The
Committee may examine the Study Group and the Expert
Group Reports referred to above, apart from any other
material. It may also consider steps for effective
F enforcement of the provisions of the FDI policy and the
FEMA Regulations referred to above. It may identify the
remedial measures which may then be considered by
appropriate authorities. The Committee may call for
suggestions from all concerned. Such Committee may be
constituted within two months. Report of the Committee
G
may be submitted within three months thereafter. The UOI
may take further action after due consideration of such
report.
(ii) The ED may complete the pending investigation within
three months;
H
S. SUKUMAR v. THE SECRETARY, INSTITUTE OF 449
CHARTERED ACCOUNTANTS OF INDIA

(iii) ICAI may further examine all the related issues at A
appropriate level as far as possible within three months
and take such further steps as may be considered
necessary. [Para 53] [497-C-H; 498-A]
State of Rajasthan vs. Gotan Lime Stone Khanji Udyog
Pvt. Ltd. [2016] (1) SCR 216 : (2016) 4 SCC 469; State B
of Karnataka vs. Selvi J. Jayalalitha (2017) 6 SCC 263
– referred to
Case Law Reference
[2016] (1) SCR 216 referred to Para 50
(2017) 6 SCC 263 referred to Para 50 C
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2422
of 2018
From the Judgment and Order dated 03.08.2015 of the High Court
of Karnataka at Bengaluru in Writ Petition No. 17959 of 2012
D
WITH
W. P. (C) No. 991 of 2013
Ms. Pinky Anand, ASG, Mukul Rohatgi, Sidharth Luthra, Sidharth
Sethi, V. Giri, Kapil Sibal, N. Ganpathy, Ramji Srinivasan, Rana
Mukherjee, Sr. Advs. Prashant Bhushan, Ms. Neha Rathi, Pranav
E
Sachdeva, R. N. Karanjawala, Ms. Ruby Singh Ahuja, Vishal Gehrana,
Utsav Trivedi, Sahil Monga, Shubham Saigal, Mrs. Manik Karanjawala
(For M/S.Karanjawala & Co.), Kunal Mimani, Dheeraj Nair, C. Mukund,
Pankaj Jain, Ms. Swati Guha Mazumdar, M. B. Elakkumanan, Mohd.
Faris, Bijoy Kumar Jain, H. S. Chandhioke, Prashant Mishra, S. Arthwan,
K. John, Abhay Kumar, Ms. Asha Gopalan Nair, Ranjeet Kumar, Balendu F
Shekhar, Ms. Snidha Mehra, Sumit T., Ms. Kirti Dua, Rajesh Ranjan,
Mrs. Anil Katiyar, Mukesh Kumar Maroria, Kamal Shankar, Atul N.,
Ms. Arti Singh, Pramod Dayal, Nikunj Dayal, Ms. Payal Dayal, Tushar
Bhardwaj, Sohil Yadav, Siddharth Singla, Ms. Swikriti Singhania, Aditya
Bhat, Ms. Shristi Singh, Dhruv Sood, Rhythm B., Ms. Bhargavi, Mayank
G
Pandey, Neelesh Singh Rao, Advs. for the appearing parties.
The Judgment of the Court was delivered by
ADARSH KUMAR GOEL, J. 1. Leave granted in SLP (Civil)
No.1808 of 2016 filed against the order dated 3rd August, 2015 of the
H
450 SUPREME COURT REPORTS [2018] 2 S.C.R.

A High Court of Karnataka in Writ Petition No.17959 of 2012. The petition
before the High Court sought direction for exercise of power under
Section 21 of the Chartered Accountants Act, 1949 (‘CA Act’) to initiate
investigation against Multi-National Accounting Firms (MAFs) and Indian
Chartered Accountancy Firms (ICAFs) having arrangement with such
MAFs for breach of Code of Professional Conduct under the CA Act
B
and also to take penal action by way of cancellation of permission granted
to them by the Institute of Chartered Accountants of India (ICAI). Since
the issue raised in Writ Petition (Civil) No.991 of 2013 is identical, both
the matters have been heard together. In the Writ Petition, some other
connected issues have also been raised to which reference will be made
C in due course.
The Issue
2. The issue raised in the appeal arising out of Karnataka High
Court Judgment and the Writ Petition filed directly in this Court is:
Whether the MAFs are operating in India in violation of law in force in
D a clandestine manner, and no effective steps are being taken to enforce
the said law. If so, what orders are required to be passed to enforce the
said law.
The Pleadings

E 3. Briefly, the averments in the High Court writ petition are: The
MAFs are illegally operating in India and providing Accounting, Auditing,
Book Keeping and Taxation Services. They are operating with the help
of ICAFs illegally. Operations of such entities are, inter alia, in violation
of Section 224 of the Companies Act, 1956, Sections 25 and 29 of the
CA Act, the Code of Conduct laid down by the ICAI. Reference has
F been made to the Report dated 15th September, 2003 of Study Group of
the ICAI on the subject (hereinafter referred to as ‘Study Group Report’).
The Study Group was constituted by the Council of the ICAI in July,
1994 to examine attempts of MAFs to operate in India without formal
registration with the ICAI and without being subject to any discipline
G and control. This was in the wake of liberalization policy and signing of
GATT by India. It was noted that the bodies corporate formed for
management consultancy services were being used as a vehicle for
procuring professional work for sister firms of Chartered Accountants
(CAs). Members of ICAI were associating with such bodies as Directors,
Managers etc. to provide escape route to MAFs. CA functions must be
H discharged by animate persons and not in anim bodies.
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 451
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

4. The concerns of various segments of CAs noted by the Study A
Group are :
“(a) Sharing fees with non-members;
(b) Networking and consolidation of Indian firms;
(c) Need to review the advertisement aspect;
B
(d) Multi disciplinary firms with other professionals;
(e) Commercial presence of multi-national accounting
firms;
(f) Impact of similarity of names between accountancy firms
and MAFs/Corporates engaged in MSC-Scope for C
reform and regulation;
(g) Strengthening knowledge base and skills;
(h) Facilitating growth of Indian CA firms & Indian CAs
internationality;
D
(i) Perspective of the Government, corporate world and
regulatory bodies and role of ICAI in shaping the view;
(j) Introduction of joint audit system;
(k) Recognition of qualifications under Clause (4) of Part
I of the First Schedule to the Chartered Accountants E
Act, 1949 for the purpose of promoting partnership with
any persons other than the CA in practice within India
or abroad;
(l) Review the concept of exclusive areas for the keeping
in view the larger public interest involved so as to
F
include internal audit within it;
(m) Conditionalities prescribed by certain financial
institutions/Governmental agencies insisting
appointment of select few firms as auditors/concurrent
auditors/consultants for their borrowers.”
G
5. The Study Group considered whether goal should be to focus
on ethics or growth of the profession with Code of Ethics being guiding
points and not barriers. Further issues were what should be the regulatory
regime; whether networking could be allowed to benefit Indian CAs;
whether MAFs may be required to furnish particulars about their
H
452 SUPREME COURT REPORTS [2018] 2 S.C.R.

A ownership, persons responsible and other financial particulars. It was
noted that the Code of Ethics under First Schedule to the CA Act prohibits
sharing of fee with persons other than members of the ICAI. Only cost
for obtaining assistance/advice to international affiliates could be given.
Indian Firms with International Affiliates (IFIA) may be required to
adhere to bench mark in regard to audit procedures, quality standards
B
etc. Decision making and real control should be with Indian firms. Number
of audits qua each partner should be fixed. Mentioning of affiliation
with any person not member of ICAI may amount to advertising which
was not permissible. It could be permitted if entities were registered
with ICAI. It was also suggested that concept of Multi disciplinary
C firms was required to be explored for rendering integrated service with
suitable safeguards. Steps to upgrade knowledge were also suggested.
However, it was suggested that commercial presence of MAFs should
not be allowed de facto or de jure. Reference was made to Surbanes
Oxley Act, 2002 in USA making a foreign public accounting firm
preparing audit report to be accountable to the Public Company
D
Accounting Oversight Board and the Securities and Exchange
Commission. Thus, MAFs could not be allowed without registration
with ICAI. Non Indian CAs should not authenticate any financial
statement of any Indian entity. MAFs’ claim to provide audit services
through affiliates amounts to indirect entry in India without requisite
E reciprocity for Indian accountancy firms. It was suggested that even
where MAFs affiliate with Indian CA, same brand should not be allowed
as in other services. Use of name identical to MAFs was brand building
exercise which gave impression that Indian CA firm was not independent.
Separation of identity was a must. Use of statutory visiting cards etc.
must display separation of identity. Under collective label of management
F
consultancy services, CA services should not be allowed as Code of
Ethics for auditors cannot be enforced in this manner. Audit cannot be
done in non professional way. Advertisement and publicity was harmful
to the cause of the profession so that user relies only on real worth of
services. It is further noted that though the CAs are not allowed to
G share fees or profits with anyone other than a member of the institute,
some of the members were lending their names to the MAFs who are
non-members and enabling them to illegally operate in the field of
Chartered Accountancy and sharing fees and profits with them. Indian
CAs have not been provided reciprocity in the countries to which the
MAFs belong as per Section 29 of the CA Act.
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 453
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

6. Reference has also been made to a report on operations of A
MAFs in India dated 29th July, 2011 submitted by Expert Group of the
ICAI (for short Expert Group Report) in the wake of the ‘Satyam Scam’,
and decisions of the ICAI laying down the Code of Conduct. The Expert
Group Report noted that the MAFs are rendering services which are
rendered by the CAs in terms of Section 2(2) of the CA Act such as
B
accountancy, auditing, professional services about matters of accounting
procedure, presentation or certification of financial facts or data. The
MAFs are corporates/juridical persons. They solicit professional work
in international brand name. They have registered Indian CA firms with
ICAI with the same brand names which are their integral part. There is
no regulatory regime for their accountability. Thus, the principle of C
reciprocity under Section 29 of the CA Act, Section 25 prohibiting
corporates from chartered accountancy practice and Code of Ethics
prohibiting advertisement and fee sharing are flouted. The MAFs also
violate FDI policy in the field of accounting, auditing, book keeping,
taxation and legal services. Detailed reference to the said report will be
D
made in the later part of the judgment.
7. The stand of the ICAI in the form of a status report filed before
the High Court is that 161 out of 171 firms were examined by the High
Powered Committee in pursuance of report of the Expert Group dated
29th July, 2011 with regard to alleged violations and some of the cases
were referred to the Director (Discipline) for further action. Remaining E
10 firms were in the process of being examined. Thus, the ICAI has
already taken action on its part.
8. The High Court observed that in view of the stand of the
ICAI, no further action was necessary and disposed of the writ petition.
F
9. In the writ petition filed directly in this Court, apart from the
averments noted above, it has been stated that PricewaterhouseCoopers
Private Limited (PwCPL) and their network audit firms operating in
India, apart from other violations, have indulged in violation of Foreign
Direct Investment (FDI) policy, Reserve Bank of India Act (RBI)/Foreign
Exchange Management Act (FEMA) which requires investigation. Firms G
operating under the brand name of PwCPL received huge sums from
abroad in violation of law and applicable policies but the concerned
authorities have failed to take appropriate action. M/s. Pricewater House,
Bangalore was the Auditor of the erstwhile Satyam Computer Services
Limited (Satyam) for more than eight years but failed to discover the H
454 SUPREME COURT REPORTS [2018] 2 S.C.R.

A biggest accounting scandal which came to light only on confession of its
Chairman in January, 2009. The said scandal attracted penalty of US
Dollars 7.5 Million (approx. Rs.38 crores) from the US Regulators apart
from other sanctions. Since certification by Auditors is of great importance
in the matter of payment of subsidies, export incentives, grants, share of
government revenue and taxes, sharing of costs and profits in PPP (Public
B
Private Partnership) contracts etc., oversight of professionals engaged
in such certification has to be as per law of the land. Accordingly, even
though investigation was sought by the petitioner vide letter dated 1st
July, 2013, no satisfactory investigation has been done.
10. PwCPL is the brand under which member firms of
C PricewaterhouseCoopers International Limited, U.K. (PwCIL), an
English private company provides professional services in respect of
audit, tax and advisory services. ‘PwC India’ firms are network member
firms of the PwCIL. There are 10 Audit Firms namely Price Waterhouse
(PW), Lovelock and Lewes (LL), Price Waterhouse Bangalore, Price
D Waterhouse & Co. Bangalore, Price Waterhouse & Co. Kolkata, Price
Waterhouse Delhi, Price Waterhouse & Co. Delhi, Price Waterhouse &
Co. Chennai, Dalal & Shah Mumbai and Dalal & Shah Ahmedabad,
besides a private limited company, namely PwCPL, who are collectively
referred to as “PwC India” firms and who operate from various metros
including Delhi. Their clients include Government departments, Public
E Sector organizations, ministries for which huge payments are made to
them. They are engaged in auditing/certifying statutory compliances.
They have violated Foreign Direct Investment (FDI) Policy, RBI master
circulars, FEMA Act and Rules. According to Notification dated May
3, 2000, under Section 47(2)(h) of FEMA Act, no person resident outside
F India can make investment by way of contribution to the capital of a
firm or a proprietary concern or any association of persons in India
without permission of the RBI. In violation of the said provision, PwC
India entities received Rs.240 crores in Financial Year 2010-2011. The
Chairman of PwC India confirmed the receipt of funds from Global
Network. Receipt of Rs.22.90 crores in the Financial Year ended March,
G 2010 is reflected in the balance sheet and profit and loss account of the
PwCPL. Receipt of Rs.7.97 crores is reflected in the balance sheet
and profit and loss account of Dalal & Shah, Mumbai. This apart,
approximately Rs.210 crores was received by PwCPL, Price Waterhouse
(PW) and Lovelock and Lewes (LL). However, no action was taken
H for receipt of these sums in violation of law. A sum of Rs.41 crores was
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 455
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

received by Price Waterhouse & Company, Kolkata to acquire another A
audit firm, Dalal & Shah, Mumbai through a circuitous route by giving
interest free loans to its four partners to enable them to invest the said
amount in Dalal & Shah, Mumbai in violations of the RBI Guidelines,
FEMA policy and ICAI Regulations.
11. There is also violation of Companies Act. Insurance premium B
has been paid by three firms of PwC for benefit of other member firms
which is illegal. Lovelock and Lewes (LL), a member firm of PwC
India failed to point out the high level of NPAs, in its audit report, resulting
in Global Trust Bank (GTB) being forced to merge with Oriental Bank
of Commerce in 2004. This happened due to accumulated losses of
GTB. LL was also found guilty of manipulating share prices and C
falsification of accounts by Serious Fraud Investigation Office (SFIO).
PwC has been found guilty of accounting scandals outside India.
12. After making the above averments, the petition suggests that
falsification of accounts should be made a non-bailable offence to ensure
effective governance and to avoid potential loss of revenue to the public D
exchequer. An independent regulator should be appointed for the auditors.
Prayer has been made for investigation into the above allegations against
the PwCPL and their network Audit Firms operating in India sharing the
brand name of PwC.
13. To sum up, the case of the petitioners is: E

(i) The MAFs violate provisions of Sections 25 and 29 of the
CA Act, the Code of Conduct laid down by the ICAI,
Companies Act, the FDI Policy as highlighted in report of
the Study Group of the ICAI dated 15th September, 2003
and the report of the Expert Group of the ICAI dated 29th F
July, 2011. Regulatory framework was required to be re-
visited to cover the gap in the existing regulatory framework
and challenge on account of operations of MAFs as noted
in the said reports. Audit functions were required to be
separated with a separate oversight body. G
(ii) PwC Services BV, Netherlands in violation of law, made
investment of Rs.41.42 crores through PwC, Kolkata to
acquire Dalal & Shah, Mumbai which is an audit firm
through a circuitous route by giving interest free loans to its
partners allowing them to invest the said amount with Dalal
H
456 SUPREME COURT REPORTS [2018] 2 S.C.R.

A & Shah, Mumbai. This is clear offence under the Benami
Transactions (Prohibition) Act. It is also an offence under
the FEMA, the Chartered Accountants Act, and RBI Master
Circulars.
(iii) The PwC Services, BV Netherlands remitted Rs.240 crores
B to various PwC entities in India for ‘enhancement of skills’.
Payment of Income Tax on the said amounts does not
legalise the remittance. The remittance shows that the
foreign company has control over Indian Firms and is thus
indirectly running chartered accountancy business in India
and also getting its return on the said amount.
C
(iv) There is falsification of accounts with regard to insurance
premium for a 280 crore policy by PwC firms in India in
violation of Companies Act, 1956.
(v) PwC is responsible for the violations by Satyam scam, failure
D of the Global Trust Bank (GTB) and UB Group (Kingfisher
Airlines) for which action ought to be taken.
(vi) SFIO and CBI have found PwC guilty. Still, the PwC firms
have not been prosecuted and have been awarded
Government contracts such as GST Suvidha Provider for
E GST Network, consultancy contract by the Kerala
Government for preparing master plan to connect Kochi
with industrial corridor of south India.
14. The prayers of the petitioners on above basis are:
(a) ICAI must take immediate action for deregistration of
F these firms in terms of their own report of 2011 which
they had themselves accepted.
(b) These audit firms ought to be prosecuted for offences
under the Chartered Accountants Act, 1949.
(c) PwC firms ought to be prosecuted under FEMA, 1999
G regarding the payment of Rs.240 crores and Rs.42 crores
by the ED.
(d) PwC Kolkata firm and partners need to be prosecuted
under the Benami Transactions (Prohibition) Act.

H (e) Investigation and action on part of ICAI and Ministry
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 457
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

of Corporate Affairs with regard to the falsification of A
accounts and wrong accounting of the insurance policy
of Rs.280 crores that was utilized by PwC Bangalore
without paying any premium.
(f) A CBI investigation into the receipt of Rs.240 crores so
that the real purpose of such receipts is known and B
necessary action may be taken.
High Powered Committee Expert Group Report dated 29th July,
2011
15. In its report dated 29th July, 2011 on Operation of Multinational
Network Accounting Firms (MAFs) in India, the expert group constituted C
by the ICAI examined the issues concerning operation of MAFs in India.
The group was constituted in the context of corporate fraud of high
magnitude revealed by the statement of Chairman of Satyam. The ICAI
sought curbing of undesirable activities/operations of MAFs. The Ministry
held a meeting with the representatives of the ICAI to identify the issues. D
Thereafter, the following issues were referred to the Expert Group by
the High Powered Committee of the ICAI:
“(a) Manner in which certain Indian CA firms, hold out to
public that they are actually MAFs in India, the manner
in which assignments are allotted, determination of E
nexus/linkage. The representatives of certain Indian
CA firms carry two visiting cards one of Indian CA firm
and another of a multinational entity. They represent
the multinational entity and seek work for Indian CA
firm.
F
(b) Name used by auditor in/his report – The basic question
was whether the auditors of M/s. Satyam had correctly
mentioned the name of their firm in the audit report.
(c) Terms and conditions and cost payable for use of
international brand name – No international firm will
G
allow its name to be used by all and sundry. The
question is what is the consideration whether it is
determined as a percentage of fee or profits and whether
it is within the framework of Chartered Accountants Act,
1949, Regulations framed, thereunder Code of Conduct
and Ethics. H
458 SUPREME COURT REPORTS [2018] 2 S.C.R.

A (d) Nature of extra benefits accrued to the Indian CA firms
having foreign affiliation.
(e) How the MAFs placed their foot in India – Long back
in a meeting with RBI it was informed that the MAFs
entered in India to set up representative offices. No
B documents are available as regards the terms and
conditions set out while granting them permission to
operate in India. However, the RBI vide its letter
No.Ref.DBS.ARS.No.744/08:91:008 (ICAI)/ 2003-2004
dated 23rd March, 2004 inter alia, mentioned that “RBI
has not permitted any foreign audit firm to set up office
C or to carry out any activity in India under the current
exchange control regulations.”
(f) Contravention of permission originally granted by
Government – What was the original permission given
for these firms to enter into India and subsequently
D whether they are adhering to the terms and conditions
of that permission? If contravention was found to take
up with Government/FIPB – for approaching
Government or FIPB, ICAI must have information as to
the nature of permission given. As already mentioned,
E no documents are available indicating the nature of
permission granted. What is the current position of
international trade in accounting and related services?
The opening up of accounting and related services, can
be linked to reciprocal opening up by developed
countries.
F
(g) Additional powers required by ICAI to curb the
malpractices – If under the existing legislation, ICAI
does not have enough powers to curb this practice,
whether they would need more powers. A separate
proposal for amendment of Chartered Accountants Act,
G 1949 has been sent by the Council to the Government
seeking additional powers.”
16. It was noted that some of the MAFs are active in India and
are rendering services which are provided by CAs without registration
with the Institute. Certain MAFs are corporate or juridical persons with
H significant commercial presence in India and are rendering assurance
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 459
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

services. They solicit professional work including audit work by including A
international brand name in their name. With the same brand names
certain Indian CA firms were registered with the ICAI. They hold out
to public that they are actually MAFs in India, whereas to the ICAI they
hold out that they are purely Indian CA firms having no relationship with
foreign entities. The government, regulators and the ICAI must ensure
B
that such wrong impression is not permitted. Entities other than CAs in
practice should be prohibited from providing auditing and assurance
services in absence of their regulation under a law. Indian CAs are not
getting mutual treatment in other countries, while the MAFs continue to
operate in India through the Indian CA firms. Entities having similar
name as that of MAFs, which entered through automatic/FIPB route, C
are rendering Chartered Accountancy services contrary to the policy of
not permitting Foreign Direct Investment (FDI) in the field of accounting,
auditing and book keeping services, taxation services and legal services.
The Institute requested the Department of Company Affairs to take the
following action:
D
“(i) for reviewing the existing situation for ensuring
reciprocal advantage in favour of the Indian accounting
profession;
(ii) to take appropriate action against MAFs if found to be
in violation including cancellation/revoking/ E
withdrawal the permission already granted to such
foreign entities;
(iii) to ensure that the non-compliance of the terms &
conditions of the permission granted by the Government
to such MAFs is dealt with effectively; F
(iv) to prohibit the MAFs/consultancy firms which have set
up commercial presence either as a corporate entity or
otherwise from defying the restrictions in terms of the
Government policy both in letter & spirit; and
(v) to ensure that the names of the companies which are G
same or similar to the names of MAFs should not be
allowed to continue to operate in India.”
17. The Institute called for information from the Indian CA firms
perceived to be having international affiliations to examine whether they
are functioning within the framework of CA profession. The exercise H
460 SUPREME COURT REPORTS [2018] 2 S.C.R.

A resulted in finding out 171 names of firms but the said firms were reluctant
to submit copies of agreements with foreign entities and their tax returns.
Certain CA firms submitted the documents by masking certain portions
contained in their agreements, partnership deeds and assessment orders/
income tax returns claiming confidentiality and commercially sensitive
nature of the documents. Some of the firms did not give the details.
B
18. The group considered network groups as ‘A’ to ‘D’. With
regard to ‘A’, it was observed that the multinational entity had permitted
the participating firms in the network to use the brand name. The
relationship between members and firms and how these are governed
from the same offices under common management and control was not
C disclosed. The linkage was clear from the data disclosed on the website.
Firms received financial grants from non-CA firms contrary to the
prohibition for the members of the Institute to receive any part of profits
from non-member of the Institute. The networking firms have made
remittances to a multinational entity, sharing their revenue purportedly
D towards subscription fees, technology cost and administration cost etc.
However, the break-ups of costs were not furnished. The cost excluded
marketing, publicity and advertising which was not allowed as per the
CA Act. The data was not furnished to support the claim that remittances
are only in respect of such matters and not related to the volume of
business generated through the efforts of the multinational entities. A
E total and full disclosure was not made in spite of repeated directions.
The domain name used by all the firms in the network was identical to
the name of the multinational entity which supports the view that they
hold out that these firms were part of international network. Some of
the firms operate from the same premises from where their international
F affiliate also operates. They share the same telephone and fax numbers.
They share human resources with other firms. Articled Assistants are
also shared without following the restrictions imposed by the ICAI.
19. With regard to group ‘B’, the multinational entity had executed
sub-licence agreements with the Indian firms. They stated that they are
G not sharing their fees or profits with any multinational entity but
reimbursement of costs relating to certain central facilities and levies
are made annually. The CA firms used name of the international entity
in their E-mail IDs. The E-mail ID and the domain name resembled the
name of the multinational entity. Thus, in the same manner, as in respect
of network ‘A’ the CA firms in network ‘B’ hold out that they are part of
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 461
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

the international network. They share same premises, same telephone A
and fax number. They made remittances annually to the multinational
entity sharing their revenue with multinational entity which they have
claimed to be towards reimbursement of cost towards central facilities
and levies. They do not provide break-up which may show that the cost
included marketing, publicity and advertising.
B
20. The firms in the Network ‘C’ are also using the MAF’s name
as part of domain name in their E-mail IDs, which is displayed in the
visiting cards of the partners of the firms.
21. Similar was the position with regard to Network ‘D’. The
firms in Network ‘D’ also used the name of multinational entity as domain C
name.
22. The Council has prescribed maximum limit for statutory audit
and tax audit which a member in practice can undertake in a year. But,
by sub-contracting the work to other firms, the firms are undertaking
more than the prescribed work leading to deterioration of quality of D
performance.
23. The member firms are required to refer the work among
themselves. In respect of some firms, referral fee is payable and
receivable. Agreements also provided for use of name and logo.
Payment/receipt of referral fee is prohibited as per code of conduct E
applicable to CAs.
24. The group noted that firms have names identical to the names
of MAFs operating in India but in absence of complete data, a conclusive
finding could not be recorded as to violation of the CA Act with regard
to sharing of fees or profits with non-members, securing business through F
solicitation/publicity. International affiliations with entities which do not
follow the same Code of Ethics as applicable to Indian CA firms vitiate
the level playing field with other Indian CA firms. Control of the Indian
CA firm is effectively placed in the hands of non-members/companies
and foreign entities.
G
25. Some of the observations in the report are:
“4.2 The Council of ICAI has deliberated that some of the MAFs
are active in India and are rendering services such as assurance
services, taxation services, etc. normally provided by Chartered
Accountants, without registration with the Institute and, without
H
462 SUPREME COURT REPORTS [2018] 2 S.C.R.

A being subject to any disciplinary and regulatory control on the
ethical and independent issues. Certain MAFs either as corporate
and other juridical persons with the Institute brand name were
given permission by the other regulators/Government for doing
consultancy business in India. These entities have established
significant commercial presence in India and are rendering
B
assurance services. These private limited companies in certain
cases solicit professional work including audits by using the
international brand name and projecting large experience,
infrastructure and international database including turnover,
manpower size, technical expertise and experience in other
C countries. These private limited companies work under the name
and style/trade name/brand name of well known MAFs and in
certain cases also co-brand multinational name with certain Indian
CA including by making presentations and organizing mega public
programmes. In fact these firms and individuals employ with
them as Directors or partners or in other capacity and hold out
D
to the public that they are MAFs. In view of their well known
brand and presence internationally the corporate sector, the
Government and the society at large and sometimes even the
regulators carry a wrong impression as if these private limited
companies are in fact MAFs and the services being provided by
E these private limited companies are actually services being
provided by such MAFs.
4.3 Certain Indian CA firms and private limited companies
associated with them hold out to public that they are actually
MAFs in India whereas to the ICAI/regulators, they hold out
F that they are purely Indian CA firms having no relationship with
foreign entities.
4.4 It is important for the Government, regulators and the ICAI
to ensure that such wrong impression is not permitted and all
entities other than Chartered Accountants in practice and CA
G firms should be actually prohibited directly or indirectly from
providing auditing and assurance services, as these are required
to be regulated in the public interest. The very objective of having
the profession relating to accountancy under specific Act of
Parliament, incorporating therein a strict disciplinary and ethical
code was to ensure that there is no dilution of the professional
H standards and services are provided in a regulated manner.
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 463
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

4.5 In certain cases, joint venture agreements, MOUs, foreign A
collaboration agreements, shareholders agreements, private equity
participations and side letters are exchanged between parties
mandating appointment auditors as prescribed by international
parent. In certain cases public sector undertakings, Government
departments/Central and State Governments advertise for various
B
professional services wherein the basic eligibility requirement
tends to favour Multinational Network Accounting firms or other
corporate entities. It has also been observed that auditors have
been replaced by Indian CA firms networked with Multinational
Network Accounting firms apparently for no professional reasons.
4.6 The ICAI has been pursuing with the accounting bodies in C
different countries for recognition of its qualification and relaxation
for its members for entry level requirements like appearance in
certain papers such as accounting, auditing as well as training
requirements giving due credit to the ICAI’s educational and
training curriculum. In addition, the Indian Chartered Accountants D
face various invisible/non-professional barriers like visa,
citizenship and residency requirements, procedural impediments
to provide services in such countries. While the Institute has
been pursuing vigorously for recognition of its qualification-for
ensuring level playing field for Indian Chartered Accountants
whereas the countries concerned are not showing a sense of E
seriousness and urgency which these matters deserve. Indian
Chartered Accountants are not getting a fair, reasonable and
mutual treatment which they deserve. Since MAFs, in corporate
or other form, are already commercially present and operating
in India on the basis of holding out as MAFs/the Indian CA Firms F
and private limited companies may be de jure owned and
managed to Indian Chartered Accountants, whereas de facto
these are fully governed MAFs having headquarters in developed
countries, who are denying a level playing field to Indian Chartered
Accountants in their country by the restrictions as explained
herein. As a result the negotiating capacity of India accounting G
services favouring the Indian accountants has been significantly
reduced. In fact, this has also adversely affected the bargaining
capacity of the Government of India for Indian accounting
profession under the ongoing negotiations under the WTO/
General Agreement of Trade in Services (GATS).
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464 SUPREME COURT REPORTS [2018] 2 S.C.R.

A xxxx
4.8 However, it has been noticed that the entities having similar
name as that of MAFs, which entered through automatic/FIPB
route for rendering management consultancy services (as defined
in CPC 865), are transgressing the permission so granted and
B are rendering taxation services (CPC 863), auditing, accounting
and book keeping services (CPC 862) and legal services (CPC
861). Instances brought to the notice of the Study Team
constituted by the Council in April, 1995 and the Study Group
constituted by the Council in February, 2002 are placed at
Annexure-III. Extracts taken from the website pages of some
C of the MAFs are given at Annexure-IV.
4.9 It is noted that as per the policy of the Government of India,
Foreign Direct Investment (FDI) is not permitted in the field of
accounting, auditing and book keeping services, taxation services
and legal services and no commitment had been made by India
D for opening of such services under the WTO/GATS. However,
some entities were not only providing services through their own
establishment (signifying their commercial presence i.e., Mode-3)
in India but also through service providers in India particularly
for those services like auditing which cannot be rendered by
E them under the relevant laws of the country.
xxx
4.16 The 171 firms from whom documents/details were called
for by and large furnished the documents that were called for.
However, certain CA firms have submitted the documents by
F masking certain portions contained in their agreements,
partnership deeds and assessment orders/income tax returns
claiming confidentiality and commercially sensitive nature of the
documents. The financial details were asked with a view to
confirm compliance of these firms with the code of ethics in
G regard to sharing of fees, inward and outward remittances, nature
of expenses, financial dealing with non-members, nature of
payment, nature of revenue sharing of fees belonging to non-
members and to identify activities not permitted within the
framework of the Chartered Accountants Act, 1949, other laws
including Foreign Exchange Management Act, 1999 and Foreign
H Contribution (Regulation) Act, 1976, Code of Ethics and Conduct.
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 465
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

Masking/omission of certain portions was construed as non- A
compliance with the directions of the Institute, and such firms
which had masked certain portions were asked to additionally
submit copies of their financial statements i.e. Income &
Expenditure Account and Balance Sheets or Statement of Affairs
including tax audit reports for the last 3 years. However, these
B
firms, instead of submitting unmasked and complete information,
had been questioning the logic/reasoning behind asking such data,
which according to the firms are commercially sensitive/
confidential. Despite reminders, some of the firms had not
submitted unmasked/complete details.
xxx C

5A.8 Observations :
(i) The multinational entity has granted permission to the
participating firms in the network to use the brand name. This is
notwithstanding the fact whether the firms have signed the D
License Agreement with the entity or not. The relationship
between members and firms how these are governed from same
offices under common management and control is not disclosed.
The data disclosed on the website, however, clearly brings out
the linkage.
E
(ii) Though some of the participating firms in the Network
‘A’ have not signed, the Verein document of Name License
Agreement yet while making remittances to the multinational
entity, the revenue of the entire network is taken into account.
(iii)The Verein document makes a mention of Supplemental F
Regulation but while submitting documents to the Institute the
firms in Network ‘A’ have not submitted a copy thereof.
(iv)The networking firms in Network ‘A’ have received
financial grants from a non-CA firm. A member of the Institute
is prohibited from receiving any part of profits from a non-member
G
of the Institute. Such an act on the part of a member/firm seems
to be in violation of Item (3) of Part I of the First Schedule to the
Chartered Accountants Act 1949.
(v) The networking firms in Network ‘A’ have made
remittances to the multinational entity, sharing their revenue with
H
466 SUPREME COURT REPORTS [2018] 2 S.C.R.

A multinational entity, which they have claimed to be towards
subscription fees, technology cost including cost of licenses –
obtained for software, budgeted expenses, cost of administration
etc. However, the firms have not provided break-up/computation
and whether the cost includes cost towards marketing, publicity
and advertising the products and services in India as well as
B
abroad and any other cost which is not allowed as per the
Chartered Accountants Act, 1949, Regulations framed thereunder
and Code of Ethics. The firms in Network ‘A’ have also not
furnished any data in support of their claim that the money remitted
by them to the multinational entity is in respect of above matters
C only and that the same in no way relates to the volume of business
generated through the efforts of the multinational entity and
through use of brand name. A total and full disclosure in this
regard has not been made in spite of repeated directions by the
High Powered Committee/Group on the basis of directions of
the Council.
D
(vi)The Verein document lay an obligation on the member
firms in Network A “to make every reasonable effort to refer
clients to other member firms”. A member of the Institute is
prohibited from securing any professional business by means
which are not open to a Chartered Accountant. However, they
E are required to follow the networking guidelines of the Institute.
Such an act on the part of a member/firm seems to be in violation
of Item (S) 1 of Part I of the First Schedule to the Chartered
Accountants Act, 1949.
(vii) The networking firms in Network A and all their
F personnel are using the domain name identical to the name of
the multinational entity in their email IDs and the same is displayed
in their visiting cards. This clearly supports holding out by these
firms in Network A that they are part of the international Network
A of MAFs. Some of these firms operate from the same premises
G from where their international affiliate also operates. They share
the same telephone and fax nos. thus establishing that they are
one and the same. The Indian firms in Network A and MAFs
are de facto the same entities providing assurance, management
and related services and as such their operations seem to
circumvent the provisions of the Chartered Accountants Act,
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 467
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

1949 and Regulations framed thereunder. A member of the A
Institute is prohibited from disclosing the affiliation with any
international entity. In this regard, the Council, at its 172nd meeting
held in January, 1995, while agreeing with the recommendation
of the then Committee on Ethical Standards and Unjustified
Removal of Auditors that the use of expression/words, “In
B
Association with ….”, Associates of ……..”, Correspondents
of ……” etc. on the stationery, letter-heads, visiting cards and
professional documents of the firm of CAs was not permissible
in view of the provisions of Item (7) of Part I of the First Schedule
to the Chartered Accountants Act,1949, decided that it should
not be permitted irrespective of whether the name sought to be C
used is the name of an Indian firm or a foreign firm.
(viii) The networking firms in Network A are sharing their
human resources with other firms in the network. However, it
has been possible to ascertain whether the articled assistances
are also being rotated among the firms. It may be mentioned D
that articled assistants are assigned to a member, whose obligation
is to train them. As such, the articled assistances cannot be
allowed to be utilized by any other member. However, to address
this issue, there exists a provision under Regulation 54 of the
Chartered Accountants, Regulations, 1988 enabling secondment
of articled assistances with a view to provide the articled assistants E
the opportunity of gaining practical experience in areas where
the principal may not be in a position to provide the same. Such
secondment is allowed under the Regulations with certain
restrictions and conditionalities and the same is required to be
sent to the Institute for records within thirty days from the date F
of commencement of training on secondment.
xxxx
5B.7 Observations :
(i) The CA firms in Network B and all their personnel are using G
the domain name identical to the name of the multinational entity
in their email IDs, and the same is displayed in the visiting cards.
This clearly supports holding out by these firms in Network C
that they are part of the international Network C of MAFs. Some
of these firms operate from the same premises from where their
international affiliate also operate. They share the same telephone H
468 SUPREME COURT REPORTS [2018] 2 S.C.R.

A and fax nos. thus establishing that they are one and the same.
The Indian firms in Network B and MAFs are de facto the
same entities providing assurance, management and related
services and as such their operations seem to circumvent the
provisions of the Chartered Accountants Act, 1949 and
Regulations framed thereunder. A member of the Institute is
B
prohibited from disclosing his affiliation with any international
entity. In this regard, the Council, at its 172nd meeting held in
January, 1995, while agreeing with the recommendation of the
then Committee on Ethical Standards and Unjustified Removal
of Auditors that the use of expression/words, “In Association
C with ……..”, “Associates of …………..”, Correspondents of
…………” etc. on the stationery, letter-heads, visiting cards and
professional documents of the firm of CAs., was not permissible
in view of the provisions of Item (7) of Part I of the First Schedule
to the Chartered Accountants Act, 1949, decided that it should
not be permitted irrespective of whether the name ought to be
D
used is the name of an Indian firm or a foreign firm.
(ii) The CA firms in Network B have made remittances annually
to the multinational entity sharing their revenue with multinational
entity which they have claimed to be towards reimbursement of
cost towards central facilities and levies. However, the firms
E have not provided break-up/computation and whether the cost
includes cost towards marketing/publicity and advertising the
products and services in India as well as abroad and any other
cost which is not allowed as per the Chartered Accountants Act,
1949, Regulations framed thereunder and the Code of Ethics.
F The firms in Network B have also not furnished any data in
support of their claim that the money remitted by them to the
multinational is in respect of above matters only and that the
same in no way relates to the vote of business generated through
the efforts of the multinational entity and through use of brand
name. A total and full disclosure in this regard has not been made
G in spite of repeated directions by the High Powered Committee/
Group on the basis of directions of the Council.
(iii) The networking firms in Network A are sharing their human
resources with other firms in the network. However, it has not
been possible to ascertain whether the articled assistants are
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 469
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

also being rotated among the firms. It may be mentioned that A
articled assistants are assigned to a member, whose obligation is
to train them. As such, the articled assistants cannot be allowed
to be utilized by any other member. However, to address this
issue, there exists a provision under Regulation, 1988 enabling
secondment of articled assistants with a view to provide the
B
articled assistants the opportunity of gaining practical experience
in areas where the principal may not be in a position to provide
the same. Such secondment is allowed under the Regulations
with certain restrictions and conditionalities and the same is
required to be sent to the Institute for records within thirty days
from the date of commencement of training on secondment. C
(iv) The obligations set out in respect of the CA firms in Network
B as per the sub-licensee agreement give a clear indication that
the CA firms are under the management and supervision of a
non-CA firm for matters such as admission of partners, merger,
purchase of assets, etc. D
xxxx
5C.4 Observations :
(i) The CA firms in Network C have amounts to the multinational
entity, which they claim to be on account of actual and allocable E
cost for activities and services provided, however, the firms have
not provided break up/computation and whether the cost includes
cost towards marketing, publicity and advertising of the products
and services in India as well as abroad and any other cost which
is not allowed as per the Chartered Accountants Act, 1949,
Regulations framed thereunder and Code of Ethics. The firms in F
Network C have also not furnished any data in support of their
claim that the money remitted by them to the multinational entity
is in respect of above matters only and that the same in no way
relates to the volume of business generated through the efforts
of the multinational entity and through use of brand name. A G
total and full disclosure in this regard has not been made in spite
of repeated directions by the High Powered Committee/Group
on the basis of directions of the Council.
(ii) The firms in Network C have admitted that the global
network identifies broad market opportunities, develops strategies,
H
470 SUPREME COURT REPORTS [2018] 2 S.C.R.

A strengthens network’s internal products and promotes
international brand. The member firms in India also gain access
to brand and marketing materials developed by their overseas
affiliate. This amounts to indirectly soliciting professional work
and securing professional business by means which are not open
to a Chartered Accountant.
B
(iii)The firms in Network C have mentioned that they have
joined the network and formed different firms in different cities
to overcome the limitation on number of partners.
(iv)The network C firms have entered into an agreement
C for sharing of resources. Sharing of human resources includes
articled assistants also, as confirmed by one of their then partners,
in a statement given by him to the members of the Committee.
It may be mentioned that articled assistants are assigned to a
member, whose obligation is to train them. As such the articled
assistants cannot be allowed to be utilized by any other member.
D However, to address this issue, there exists a provision under
Regulation 54 of the Chartered Accountants Regulations, 1988
enabling secondment of articled assistants with a view to provide
the articled assistants the opportunity of gaining practical
experience in areas where the principal may not be in a position
E to provide the same. Such secondment is allowed under the
Regulations with certain restrictions and conditionalities and the
same is required to be sent to the Institute for records within
thirty days from the date of commencement of training on
secondment.

F (v) The firms in the Network C and all its personnel are
using the MAFs name as part of domain name in their email
IDs, which is displayed in the visiting cards of the partners of
these firms as well as the CA employees. This clearly supports
holding out by these firms in Network C that they are part of the
International Network C of MAFs. Some of these firms operate
G from the same premises from where their international affiliate
also operates. They share the same telephone and fax nos. thus
establishing that they are one and the same. The Indian firms
and MAFs are de facto the same entities providing assurance/
management and related services and as such their operations
H seem to circumvent the provisions of the Chartered Accountant
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 471
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

Act, 1949 and Regulations framed thereunder. A member of the A
Institute is prohibited from disclosing his affiliation with any
International entity. In this regard, the Council, at its 172nd meeting
held in January, 1995, while agreeing with the recommendation
of then Committee on Ethical Standards and Unjustified Removal
of Auditors that the use of expression/words, “In Association
B
with ……..”, “Associates of …………”, Correspondents of
………” etc. on the stationery, letter-heads, visiting cards and
professional documents of the firm of CAs, was not permissible
in view of the provisions of Item (7) of Part I of the First Schedule
to the Chartered Accountants Act, 1949, decided that it should
not be permitted irrespective of whether the name sought to be C
used is the name of an Indian firm or a foreign firm.
(vi) As per the Name License Agreement, the CA firm in
Network C shall be liable for and will indemnify the Business
Trust against any and availability, loss, damage, cost, legal cost
and other expenses of any nature suffered, or incurred by the D
Business Trust arising out of any dispute against the Business
Trust by a third party.
(vii) The service as defined in the agreement with the Trust
granting license for use of name, prescribes the services which
will be covered by the said Trust and rendered by the CA firm. E
This includes audit, assurance as well as tax advisory services.
(viii) The letterheads and the visiting cards furnished by the
firm in Network C do not mention anywhere that it is a firm of
Chartered Accountants.
5D.6 Observations : F
(i) The firms in Network D have a management services
agreement, technical services agreements, regulations and name
license agreements with other entities, copies of which have not
been furnished by the firms.
G
(ii) The firms in Network D and all their personnel have been
using the name of multinational entity as domain name in their
email IDs, which is displayed in the visiting cards used by the
partners of these firms as well as their CA employees. This
clearly supports holding out by these firms that they are part of
the international Network D of MAFs. Some of these firms H
472 SUPREME COURT REPORTS [2018] 2 S.C.R.

A operate from the same premises from where their international
affiliate also operates. They share the same telephone and fax
nos. thus indicating that they are one and the same. The Indian
firms and MAFs are de facto the same entities providing
assurance, management and related services and as such their
operations seem to circumvent the provisions of the Chartered
B
Accountants Act, 1949 and Regulations framed thereunder. A
member of the Institute is prohibited from disclosing his affiliation
with any international entity. In this regard, the Council at its
172nd meeting held in January, 1995, while agreeing with the
recommendation of the then Committee on Ethical Standards
C and Unjustified Removal of Auditors that the use of expression/
words, “In Association with ……….”, “Associates of
…………”, Correspondents of ………” etc. on the stationery,
letter-heads, visiting cards and professional documents of the
firm of CAs, was not permissible in view of the provisions of
Item (7) of Part I of the First Schedule to the Chartered
D
Accountants Act, 1949, decided that it should not be permitted
irrespective of whether the name sought to be used is the name
of an Indian firm or a foreign firm.
(iii)The firms in the Network D have signed an agreement
for sharing of human resources; however, it has not been possible
E to ascertain whether the articled assistants are assigned to a
member, whose obligation is to train them. As such, the articled
assistants cannot be allowed to be utilized by any other member.
However, to address this issue/there exists a provision under
Regulation 54 of the Chartered Accountants Regulations, 1988
F enabling secondment assistants with a view to provide the articled
assistants the opportunity of gaining practical experience in areas
where the principal may not be in a position to provide the same.
Such secondment is allowed under the Regulations with certain
restrictions and conditionalities and the same is required to be
sent to the Institute for records within thirty days from the date
G of commencement of training on secondment.
(iv) One of the network firms in Network D, though is yet to
sign the agreement with the multinational entity, but has already
been operating as part of the multinational entity’s network and
complies with the obligations.
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 473
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

(v) The amount of remittance made by firms in Network D to A
the multinational entity (exceeding Rs.XXXX million in a year)
has been disclosed. However, the firms in Network D have not
provided break up computation and whether the cost includes
cost towards marketing, publicity and advertising the products
and services in India as well as abroad and any other cost which
B
is not allowed as per the Chartered Accountants Act, 1949,
Regulations framed thereunder and Code of Ethics. The firms
have also not furnished any data in support of their claim that the
money remitted by them to the multinational entity is in respect
of above matters only and the same in no way relates to the
volume of business generated through the efforts of the C
multinational entity and through use of brand name. A total and
full disclosure in this regard has not been made in spite of repeated
directions by the High Powered Committee/Group on the basis
of directions of the Council.
xxx D
6. Findings
6.1 The Committee/Group with a view to ascertain compliance
with the various aspects of Code of Ethics had received
documents/details listed in para 4.13 hereinabove, from 171 firms.
Based on information received, it was found absence of affiliation E
etc. to 135. Of these, nearly firms submitted data in entirety.
Other firms submitted most of the data, such as financial that for
various reasons the number of firms actually 73% of the firms
submitted the data masking of withholding most of the important
data, such as financial figures, profit sharing, capital contribution F
etc. primarily on the grounds of commercial sensitiveness/
confidentiality of the data.
6.2 In the absence of complete set of documents such as
complete copy of agreements between some of the Indian CA
firms and their international affiliates/network along with G
annexures referred thereto, networking agreement, internal
regulations, service agreements, statute of international affiliate
etc. it was not possible to draw conclusive inference as to violation
of the Chartered Accountants Act, 1949 with reference to sharing
of fees or profits with non-members, sharing profits of non-
members, securing business through means not open to Chartered H
474 SUPREME COURT REPORTS [2018] 2 S.C.R.

A Accountants, solicitation, direct or indirect publicity etc. This shall
require proper examination under the relevant provisions of
Sections 21, 22 and Schedules framed thereunder.
6.3 Most of these networks are created/established outside
India and are functioning under different set of ethical and
B regulatory guidelines. The India CA firms having international
affiliations are subject to regulatory jurisdiction of ICAI and are
required to follow the Code of Ethics applicable to Chartered
Accountants in India. However, due to the dichotomy of other
entities operating in close association with the Indian CA firms,
often permitting common brand name/using of logos, coupled
C with leveraging on international resources etc., is vitiating the
level playing field with other Indian CA firms.
6.4 Most of these firms have a name license agreement to use
International brand name. One of the terms of such agreement
is that apart from common professional standards etc., the Indian
D affiliates shall harmonize their policies etc. with the global policies
of the network. In this manner, matters such as selection and
appointment of partners, acquisition of assets, investment in capital
etc. are regulated through the means of such agreements and at
time even the representative voting is held by an aligned private
E limited company rather than the CA firms themselves. As a
consequence of this, the control of the Indian CA firms is
effectively placed in the hands of non-members/companies
foreign entities. The desirability of such a practice from the point
of view of independence needs to be examined in the light of
Code of Ethics and Schedules to the Chartered Accountants
F Act, 1949 and Sections 21 and 22 thereof.
6.5 In respect of some firms with names approved by Institute
e.g. “XYZ & Co., Patna”, the partnership deeds sent by the said
firm revealed that the name of the firm is given as “XYZ &
Co.” and not as “XYZ & Co. Patna” which is the name registered
G by the Institute. This means that the firm has submitted to the
Institute the partnership deed of a firm by the name “XYZ &
Co.”, whereas the partnership deed supposed to have been
submitted should be that of “XYZ & Co., Patna”. Letters were
written to such firms requesting them to submit the appropriate
H partnership deed. The first have replied that it was an inadvertent
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 475
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

mistake on their part and on the part of the Institute which had A
approved a trade/firm name with city name as the suffix.
6.6 The firms, M/s WZ, Patna and M/s XYZ & Co. Patna,
vide form No.117 sought approval of the Council of the Institute
for the firm name, ‘XYZ, Patna’ and ‘XYZ & Co., Patna’
respectively. The subsequent forms 18 filed by the firm, for B
change in the constitution, also mention the firm name as such.
However, the partners of the firm, while affixing their signatures
on the audit reports, mention the name of the firm as ‘XYZ’ and
‘XYZ & Co.’ respectively. The audit reports of companies,
which were audited by them, have been signed on behalf of ‘M/
s XYZ’ and not ‘M/s XYZ Patna’ and by ‘M/s. XYZ & Co.’ C
and not ‘M/s. XYZ & Co. Patna’. It is an accepted fact that M/
s XYZ, Patna and M/s XYZ & Co. Patna have carried out audits
of certain companies whose shareholders have appointed M/s
XYZ as the auditors. M/s XYZ and M/s XYZ & Co., by allowing
the partners of M/s XYZ, Patna and M/s XYZ & Co. Patna D
respectively to audit the accounts of clients have rendered the
audited accounts invalid ab-initio.
6.7 It is noted that Item (1) of Part I of the Second Schedule to
the Chartered Accountants Act, 1949, which deals with
professional misconduct in relation to Chartered Accountants in E
practice, mentions that a chartered accountant in practice shall
be deemed to be guilty of professional misconduct, if he discloses
information acquired in the course of his professional engagement
to any person other than his client so engaging him, without the
consent of his client or otherwise than as required by any law
for the time being in force. The auditors, by allowing the audit to F
be conducted by an unauthorized firm, without the consent of
the client, which was not appointed as the statutory auditors,
may have allowed all information relating to the audit being passed
on to the said firm, thus breaching the aforesaid Item, for which
both the firms which were appointed and the one which carried G
out the audit, may be in violation of the Code of Ethics.
6.8 In response to Institute’s letter, some firms have furnished
details/documents after masking or eliminating certain portion
such as financial figures, profit sharing ratio, capital contribution
etc. The Institute has sent numerous letters to these CA firms H
476 SUPREME COURT REPORTS [2018] 2 S.C.R.

A for providing the information particularly, copies of agreements/
contracts they have with their international affiliates/networks
with complete annexures, partnership deed with complete
annexures and schedules mentioned therein, assessment orders
and/or tax returns, financial statements i.e. income and
expenditure statement, balance sheet or statement of affairs
B
including tax audit reports. As stated earlier, most of the firms
have submitted copies of agreements/contracts, partnership
deeds, assessment orders or income-tax returns but around 27%
of firms have not furnished the information and have masked/
blackened/not provided the important information. It may be
C further stated that some of the firms instead of complying with
the directions of the Institute, have questioned the logic/reasoning
behind seeking copies of income-tax returns, which according to
them are commercially sensitive/confidential. One group of firms
belonging to one network has cited two legal opinions that they
have obtained in this regard and have declined to submit unmasked
D
details.
However, they have sought personal hearing. As mentioned
earlier, the Group considered this matter and noted that documents
have been called in pursuance of the directions given by the
Council and that detailed reasoning for calling of documents has
E also been given to the firms. Hence, the Group felt that it would
not be within its powers to override directions of the Council and
grant any concession to certain firms.
6.9 Section 2(2) of the Chartered Accountants Act, 1949 defines
the term ‘to be in practice’. Pursuant to Section 2(2) above, the
F Council of the Institute has passed a resolution permitting
Chartered Accountants in practice to render entire range of
management consultancy and other services. The members of
the Institute are governed by a Code of Ethics which is mandatory
for every member of the Institute. The services rendered by the
G multinational entities in India are also to the nature of management
consultancy (including financial services, valuation, audit and
assurance services etc.) and other related services which are
carried on through the medium of private limited companies which
are carried using the internationally known accounting firm’s
name. Since these entities employ Chartered Accountants as
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 477
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

well as non-Chartered Accountants for discharging various A
responsibilities, a misleading Impression is created that the
services rendered by the private limited companies are in fact
rendered by a Multinational Accounting Firm. In fact, this is not
so as the company rendering such services is neither registered
with ICAI nor is governed by any ethical code or regulatory
B
framework.”
26. Accordingly, the recommendations were made to the effect
that the Council should consider action against the firms which had not
given the full information; consider action against the firms who are
sharing revenue with multinational entity/consulting entity in India which
may include cost of marketing, publicity and advertising as against the C
ethics of CAs; action should be considered against the firms who had
received financial grant from the multinational entities in spite of prohibition
against the CA firms. A member is not allowed to accept any share,
commission or brokerage from a non-member unless such non-member
is a member of a professional body with prescribed qualifications. Further D
recommendation is that action be taken against the audit firms distributing
its work to other firms and allowing them access to all confidential
information without the consent of the client; require the CA firms to
maintain necessary data about the remittances made and received on
account of networking arrangement or sharing of fee; consider action
against firms being paid or offered referral fee; it should be made E
mandatory for all firms who enter into any kind of affiliation/arrangement
with any foreign entity to disclose their international affiliation/arrangement
every year to the Institute; Council should consider action against the
firms using name and logo of international networks; action should also
be considered for securing professional business by means which are F
not open to CAs in India. The Council should also issue public statement
that without specific approval of the Council, by a notification under
Section 29(2) of the CA Act, no MAF can directly or indirectly operate
in India through any agreement or arrangement with any Indian entity/
firm of CAs. No international firm or entity should be permitted to hold
out to public that they are operating in India as a MAF as part of their G
network. No Indian CA firm should be permitted to pay any part of their
profit or fee or other receipts to any person other than a member of
ICAI or a firm owned by them by way of cost or percentage except
payment for specific professional fee. The Council may request the
Ministry of Corporate Affairs, Reserve Bank of India and other relevant H
478 SUPREME COURT REPORTS [2018] 2 S.C.R.

A Ministries/Departments to take appropriate action so that the
recommendations can be implemented to engage the services of
accounting firms registered with ICAI. Only CAs and CA firms registered
with ICAI should be permitted to provide audit and assurance services.
Wherever MAFs are operating in India, directly or indirectly, they should
not engage in any audit and assurance services without ‘No Objection’
B
and permission from ICAI and RBI. Instructions may be issued that
any joint venture agreement, MOU, foreign collaboration agreement,
stakeholders agreement, private equity fund condition, venture capital
fund condition or side letters prescribing for appointment of a specific
Chartered Accountant or a CA Firm or any other entity are illegal and
C against public interest.
Stand of the ICAI
27. ICAI in its response submitted that the function of the institute
was to regulate the profession of chartered accountancy and to take
action against misconduct of its members under The Chartered
D Accountants (Procedure of Investigations of Professional and Other
Misconduct and Conduct of Cases) Rules, 2007. The accounting
professionals had significant role in the economy of the country. The
economy of India had witnessed two major securities scams in 1992 and
2001. The CA Act was amended on the recommendation of the Joint
E Parliamentary Committee which enquired into the stock market scams
including the high level committee on the ‘Corporate Audit and
Governance’ under the chairmanship of Shri Naresh Chandra which
examined the Auditor-Company relationship and disciplinary mechanism
for the Auditors. Amendment was proposed by the Council of the Institute
to establish a Disciplinary Directorate headed by Director (Discipline).
F
28. In response to the grievance that no action was taken against
PwCPL and their network audit firms in India, the ICAI submitted that
its Disciplinary Directorate had already taken cognizance of the
information in the Article dated 17th January, 2012 in the Times of India
“Sundry Income cushions PwC India”. Letter dated 9th March, 2012
G was written to PwC, New Delhi, Chennai, Bangalore, PwC, Kolkata,
LL, Kolkata. A letter was also written to RBI. The stand of the PwC
firms, was that news item did not make any reference to their firms and
no clarification was necessary. PwC, Kolkata submitted that it was
member of PwC network of firms around the world (‘PwC Network’).
H To maintain the quality standards of all members, a grant of Rs.65 crores
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 479
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

was given to them by the PricewaterhouseCoopers Services BV during A
the financial year ended 31st March, 2011 as an outright, non refundable
grant. The same was included in the “Sundry Income” in their annual
accounts. The stand of LL, Kolkata, was that it was a member of PwC
Network of Firms around the world. It received grant of Rs.28.97 crores
for maintaining quality standards from PwC Services BV during the
B
financial year ended 31st March, 2011 as an outright, non-refundable
grant. The Disciplinary Directorate sent a reminder to the RBI and sent
a letter to the Commissioner of Income Tax, Kolkata and Joint Secretary
(Revenue), Ministry of Finance. The Deputy Commissioner of Income
Tax, Kolkata stated that scrutiny proceedings on issue of transfer pricing
were pending for the assessment year 2010-2011 and 2011-2012 in C
respect of PwCPL. With regard to the failure of PwC, Bangalore to
discover the scandal of ‘Satyam’, it was stated that the US Regulators,
i.e., Securities and Exchange Commission (SEC) and PCAOB had taken
action but in India the proceedings were getting prolonged. As regards
failure of LL to point out high level of NPAs of GTB, it was submitted
D
that no formal complaint was filed against PwCPL. The same is not
registered and the Institute could not take any action against them under
the CA Act as amended in 2006 and 2007 Rules. Action was taken
against the members of LL, Shri S. Gopalakrishnan, Shri P. Rama Krishna
and Shri Manish Agarwal. Action was also taken against Shri Kersi H.
Vachha and Shri Amal Ganguli. In 2002-2003 action was taken against E
Shri Partha Ghosh and Shri D.V.P. Rao of M/s. PwC. PwC Bangalore
were the auditors of ‘Satyam’ for which action was taken against CA S.
Gopalakrishnan (For the period 1.4.2000 to 31.3.2007), CA S. Talluri
(For the period 1.4.2007 to 30.9.2008), CA Pulavarthi Siva Prasad (for
the period 1.4.2001 to 31.3.2005), CA Chintapatla Ravindernath (for the
F
period 1.4.2005 to 30.9.2008). Action was also taken against V. Srinivasu,
the then CFO of the Satyam, V.S. Prabhakara Gupta, the then head of
Internal Audit Cell of Satyam. The Joint Director, SFIO filed a complaint
dated 3rd March, 2009 in respect of DSQ Softwares Limited against CA
Naresh Kumar Tharad of M/s. N.K. Tharad & Co., Chartered
Accountants, Kolkata. It was revealed that company had made G
preferential allotment of shares to various entities in a fraudulent manner.
Stand of the Respondent-Firms
29. In its written submissions, Respondent No.5 M/s. Deloitte
Haskins & Sells submitted that there is no allegation against it in the
SLP. All the partners of Respondent No.5 were Indians and the firm H
480 SUPREME COURT REPORTS [2018] 2 S.C.R.

A was also registered with the ICAI. An expert group was constituted by
the Ministry of Corporate Affairs which gave its report dated January
31, 2017 to the effect that Big six firms (MAFs) were not operating
directly. Their network partners were rendering audit services. Indian
network firms pay global network charges to their parent organization
towards sharing common global costs of human resources and other
B
infrastructure, technology cost. This is a standard practice across
jurisdictions. It does not make MAFs subject to the control by the global
parent. MAFs cannot be considered as multinational entities as there is
no foreign control through ownership or management. Network partners
are run, controlled and managed by Indian nationals. It was submitted
C the writ petition was not maintainable.
30. Reference has also been made to letter dated 3rd July, 2017
addressed to the Secretary, Ministry of Corporate Affairs from the PMO,
with reference to the said expert group incorporating the conclusions of
the expert group as follows:
D “a) The accounting and auditing standards and practices
followed in India should be aligned to international
standards and practices with customization to the extent
necessary.
b) The small size of majority of India audit firms being a
E constraint in facing global competition, consolidation
through merger and networking of India audit firms
should be encouraged through policy measures.
c) With audit becoming a multi disciplinary function,
formation of multi disciplinary audit firms with
F participation by professionals from other relevant
professions should be promoted.
d) It should be ensured that the recommendations of
Quality Review Board conducting technical evaluations
of India audit firms are implemented.
e) If and when audit and assurance are opened to global
G
competition, the principle of reciprocity should be
followed and the interests of India audit firms should
be given due consideration.”
31. The stand of the PwC Network (Respondents 6 to 11) is that
PwC or PW is the brand owned by PwCIL registered under the laws of
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 481
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

England limited by guarantee. PwCIL acts as a coordinating company A
within the PwC network and does not provide any business or audit
services. Respondent Nos.6 to 11 are member entities of the PwC
Network which consists of companies and firms around the world all of
which are separate legal entities. PwCIL allows desirous entities to
become members of the PwC network if they follow global standards to
B
provide quality services for clients in respect of audit/non audit services.
Uniform and consistent delivery is important. PwC network is not a
global partnership. The network activities are to develop and implement
policies and initiatives for a common and coordinated approach to maintain
quality and standards of service. PwC brand name is based on name
licence agreement to exercise cooperation amongst member firms. All C
the members (in 177 countries) have to pay a licence fees. PwC Services
BV (Services BV) is incorporated in Netherlands to operationalize global
standards of services. Services BV coordinates efforts of various firms
across the globe to develop superior global common standard. Services
BV does not do any client related work but develop standards. It pools
D
money by charging the network entities a percentage of their revenue
which is used to meet the expenses to develop standards. Firm Service
Agreements are signed by network entities. Services BV works on no
profit no loss basis. Network charges are paid by all member entities
including the Indian member entities. The network felt the need of
enhancing the standards and capacity of Indian network entities for which E
non refundable grants were provided. The grants are not in the nature of
investment. These are current account transactions and not capital
account transactions. For FY 2009-10, the grants were taxed but network
charges paid to Services BV were disallowed as deduction. For FY
2010-11 assessment order has been passed on 29th September, 2016
F
against which appeal was pending.
32. The Enforcement Directorate (ED) sought information in
respect of funds received from outside India. In March and August,
2016, ED issued summons. In July, 2017, ED again issued summons
under Section 37 of FEMA seeking details of inward/outward remittances.
In August, 2017, the Chief Financial Officer (CFO) was issued summons G
by the ED to provide information about the remittances.
33. The Registrar of Companies issued notices to show cause why
prosecution should not be launched against the Directors and Company
Secretary of the PwCPL in January, 2013. Company Law Board allowed
H
482 SUPREME COURT REPORTS [2018] 2 S.C.R.

A compounding of the offences on payment of composition amount of
Rs.8,31,000/-.
34. Auditing services are being carried by firms belonging to PwC
Group as follows :
i) Price Waterhouse [FRN-310002E] – 66 Indian Partners
B (Respondent No.7)
ii) Lovelock & Lewes [FRN-301056E] – 66 Indian Partners
(Respondent No.8)
iii) Price Waterhouse & Co. [FRN-050032S] – 19 Indian
Partners (Respondent No.9)
C iv) Price Waterhouse, Bangalore [FRN-007568S] – 18 Indian
Partners (Respondent No.10)
v) Dalal & Shah LLP [FRN-102021W/W100110] – 16 Indian
Partners (Respondent NO.11)
35. There are other LLPs which are members of PwC Network
D in India. All the partners are Indian by nationality and registered with
ICAI. Directors are not partners. Indian Chartered Accountant member
firms of PwC Network operate as independent entities.
36. Guidelines of the ICAI dated 27th September, 2011 apply to a
network if the network has common ownership, control or management,
E common quality control policies and procedures, common business
strategy, use of a common brand name or a significant part of professional
resources.
37. The Expert Group Report of the ICAI recommended the
following:
F
“No person or entity and specially Chartered Accountants
can hold out to public that they are operating in India as or
on behalf or in their trade name and in any other manner so
as to represent them being part of or authorized by MAFs to
operate on their behalf in India or they are actually
G representing MAFs or they are MAFs office/representatives
in India, except those registered with ICAI in terms of Clause
(Hi) as a network, in accordance with network guidelines
as notified by the ICAI from time to time.”
[(Clause 7.12 (v) of the Report at pg.152 of SLP No.1808 of
H 2016].”
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 483
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

38. The guidelines allow registration of a network and the PwC A
firms have filed their declaration in accordance with the above guidelines
and are registered in India as per Regulations of the ICAI. Merely
because the PwC audit firms are part of global PwC Network does not
by itself violate any applicable law. As regards the grants received in
Financial Years 2008-09, 2009-10 and 2010-11, amounting to Rs.142.9,
B
tax has been paid as per assessment and proceedings are pending. The
Network has furnished all the information to the ICAI.
39. Since all the partners are Indians and are registered with ICAI,
they are personally accountable to the ICAI for any professional
misconduct. Services BV does not have any stake in the partnership or
profits of the firms. Thus, there is no violation of Section 25 of the CA C
Act.
Stand of Central Board of Direct Taxes (CBDT)/ED
40. Stand taken by the CBDT is that on receipt of letter dated 1st
July, 2013 from the Advocate for the petitioner, investigation was D
conducted by the Director General of Income Tax (Investigation) (DGIT)
with regard to the income tax implications. It was found that 11 entities
belonging to the PwC Group are operating in India. Four entities have
received grants of Rs.477.64 crores from PwC Services BV during the
period 2009 to 2013. The grants are of two types – professional capacity
building and business expansion. Rs.416.39 crores are offered for tax E
which were taxed for professional capacity building as “sundry income”.
The balance was claimed as capital receipt for expansion of business.
The Assessing Officer made assessment of tax and proceedings were
pending. According to ED, investigation in the matter is pending, though
number of witnesses have been examined. F
Stand of the Registrar of Companies (ROC)
41. The stand of the ROC, Kolkata is that prosecution was initiated
against the auditors of the Company, who compounded the offences.
Certain proceedings are still pending against the auditors of the Company.
G
Stand of the RBI
42. The stand of the RBI is that it only issues circulars and frames
Regulations under the FEMA but does not conduct any investigation for
compliance thereof. Regulation 3 of the Foreign Exchange Management
(Investment in Firm or Proprietary concern in India) Regulations, 2000
H
484 SUPREME COURT REPORTS [2018] 2 S.C.R.

A is that a person resident outside India cannot invest in a firm or proprietary
concern without permission of the RBI. As per para 3.3.2 of the FDI
Policy, investment without prior approval of the RBI is not permitted.
The statutory provisions
43.Sections 2(2), 25 and 29 of the CA Act are reproduced
B below:
“2 (2) A member of the Institute shall be deemed “to be in
practice”, when individually or in partnership with chartered
accountants [in practice], he, in consideration of remuneration
received or to be received— (i) engages himself in the practice
C of accountancy; or (ii) offers to perform or performs services
involving the auditing or verification of financial transactions,
books, accounts or records, or the preparation, verification or
certification of financial accounting and related statements or
holds himself out to the public as an accountant; or (iii) renders
D professional services or assistance in or about matters of principle
or detail relating to accounting procedure or the recording,
presentation or certification of financial facts or data; or] (iv)
renders such other services as, in the opinion of the Council, are
or may be rendered by a chartered accountant [in practice]; and
the words “to be in practice” with their grammatical variations
E and cognate expressions shall be construed accordingly. 3
Explanation:— An associate or a fellow of the Institute who is a
salaried employee of a chartered accountant [in practice] or [a
firm, of such chartered accountants] shall, notwithstanding such
employment, be deemed to be in practice for the limited purpose
F of the [training of articled [assistants]].
25. Companies not to engage in accountancy. (1) No company,
whether incorporated in India or elsewhere, shall practise as
chartered accountants. (2) If any company contravenes the
provisions of sub-section (1), then, without prejudice to any other
proceedings which may be taken against the company, every
G director, manager, secretary and any other officer thereof who
is knowingly a party to such contravention shall be punishable
with fine which may extend on first conviction to one thousand
rupees, and on any subsequent conviction to five thousand rupees.
29. Reciprocity. (1) Where any country, specified by the Central
H Government in this behalf by notification in the official Gazette,
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 485
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

prevents persons of Indian domicile from becoming members of A
any institution similar to the Institute of Chartered Accountants
of India or from practising the profession of accountancy or
subjects them to unfair discrimination in that country, no subject
of any such country shall be entitled to become a member of the
Institute or practise the profession of accountancy in India. (2)
B
Subject to the provisions of sub-section (1), the Council may
prescribe the conditions, if any, subject to which foreign
qualifications relating to accountancy shall be recognised for the
purposes of entry in the Register. [29A. Power of Central
Government to make rules. (1) The Central Government may,
by notification, make rules to carry out the provisions of this Act. C
(2) In particular and without prejudice to the generality of the
foregoing powers, such rules may provide for all or any of the
following matters, namely:- (a) the manner of election and
nomination in respect of members to the Council under sub-
section (2) of section 9; (b) the terms and conditions of service
D
of the Presiding Officer and Members of the tribunal, place of
meetings and allowances to be paid to them under sub-section
(3) of section 10B; (c) the procedure of investigation under sub-
section (4) of section 21; (d) the procedure while considering
the cases by the Disciplinary Committee under sub-section (2),
and the fixation of allowances of the nominated members under E
sub-section (4) of section 21B; (e) the allowances and terms
and conditions of service of the Chairperson and members of
the Authority and the manner of meeting expenditure by the
Council under section 22C; (f) the procedure to be followed by
the Board in its meetings under section 28C; and (g) the terms
F
and conditions of service of the Chairperson and members of
the Board under sub-section (1) of section 28D.]”
First and Second Schedule of the CA Act :
[THE FIRST SCHEDULE]
[See Sections 21(3), 21A(3) and 22] G
PART I
Professional misconduct in relation to chartered
accountants in practice
A chartered accountant in practice shall be deemed to be guilty
of professional misconduct, if he — H
486 SUPREME COURT REPORTS [2018] 2 S.C.R.

A (1) allows any person to practice in his name as a chartered
accountant unless such person is also a chartered accountant in
practice and is in partnership with or employed by him;
(2) pays or allows or agrees to pay or allow, directly or indirectly,
any share, commission or brokerage in the fees or profits of his
B professional business, to any person other than a member of the
Institute or a partner or a retired partner or the legal
representative of a deceased partner, or a member of any other
professional body or with such other persons having such
qualifications as may be prescribed, for the purpose of rendering
such professional services from time to time in or outside India.
C
Explanation. - In this item, “partner” includes a person residing
outside India with whom a chartered accountant in practice has
entered into partnership which is not in contravention of item (4)
of this Part;
D (3) accepts or agrees to accept any part of the profits of the
professional work of a person who is not a member of the Institute:
Provided that nothing herein contained shall be construed as
prohibiting a member from entering into profit sharing or other
similar arrangements, including receiving any share commission
E or brokerage in the fees, with a member of such professional
body or other person having qualifications, as is referred to in
item (2) of this Part;
(4) enters into partnership, in or outside India, with any person
other than a chartered accountant in practice or such other person
F who is a member of any other professional body having such
qualifications as may be prescribed, including a resident who but
for his residence abroad would be entitled to be registered as a
member under clause (v) of sub-section (1) of section 4 or whose
qualifications are recognised by the Central Government or the
Council for the purpose of permitting such partnerships;
G
(5) secures, either through the services of a person who is not
an employee of such chartered accountant or who is not his
partner or by means which are not open to a chartered accountant,
any professional business:
Provided that nothing herein contained shall be construed as
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S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 487
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

prohibiting any arrangement permitted in terms of items (2), (3) A
and (4) of this Part;
(6) solicits clients or professional work either directly or indirectly
by circular, advertisement, personal communication or interview
or by any other means:
Provided that nothing herein contained shall be construed as B
preventing or prohibiting –
(i) any chartered accountant from applying or requesting for or
inviting or securing professional work from another chartered
accountant in practice; or
C
(ii) a member from responding to tenders or enquiries issued by
various users of professional services or organisations from time
to time and securing professional work as a consequence;
(7) advertises his professional attainments or services, or uses
any designation or expressions other than chartered accountant D
on professional documents, visiting cards, letter heads or sign
boards, unless it be a degree of a University established by law
in India or recognised by the Central Government or a title
indicating membership of the Institute of Chartered Accountants
of India or of any other institution that has been recognised by
the Central Government or may be recognised by the Council: E
Provided that a member in practice may advertise through a
write up setting out the services provided by him or his firm and
particulars of his firm subject to such guidelines as may be issued
by the Council;
F
(8) accepts a position as auditor previously held by another
chartered accountant or a certified auditor who has been issued
certificate under the Restricted Certificate Rules, 1932 without
first communicating with him in writing;
(9) accepts an appointment as auditor of a company without
first ascertaining from it whether the requirements of section G
225 of the Companies Act, 1956 9 1 of 1956] in respect of such
appointment have been duly complied with;
(10) charges or offers to charge, accepts or offers to accept in
respect of any professional employment, fees which are based
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488 SUPREME COURT REPORTS [2018] 2 S.C.R.

A on a percentage of profits or which are contingent upon the
findings, or results of such employment, except as permitted under
any regulation made under this Act;
(11) engages in any business or occupation other than the
profession of chartered accountant unless permitted by the Council
B so to engage:
Provided that nothing contained herein shall disentitle a chartered
accountant from being a director of a company (not being a
managing director or a whole time director) unless he or any of
his partners is interested in such company as an auditor;
C (12) allows a person not being a member of the Institute in
practice, or a member not being his partner to sign on his behalf
or on behalf of his firm, any balance-sheet, profit and loss account,
report or financial statements.
PART II
D
Professional misconduct in relation to members of the
Institute in service
A member of the Institute (other than a member in practice)
shall be deemed to be guilty of professional misconduct, if he
being an employee of any company, firm or person –
E
(1) pays or allows or agrees to pay directly or indirectly to any
person any share in the emoluments of the employment
undertaken by him;
(2) accepts or agrees to accept any part of fees, profits or gains
F from a lawyer, a chartered accountant or broker engaged by
such company, firm or person or agent or customer of such
company, firm or person by way of commission or gratification.
PART III
Professional misconduct in relation to members of the
G Institute generally
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of professional misconduct, if he –
(1) not being a fellow of the Institute, acts as a fellow of the
Institute;
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 489
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

(2) does not supply the information called for, or does not comply A
with the requirements asked for, by the Institute, Council or any
of its Committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the Appellate
Authority;
(3) while inviting professional work from another chartered B
accountant or while responding to tenders or enquiries or while
advertising through a write up, or anything as provided for in
items (6) and (7) of Part I of this Schedule, gives information
knowing it to be false.
PART IV C
Other misconduct in relation to members of the Institute
generally
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of other misconduct, if he—
D
(1) is held guilty by any civil or criminal court for an offence
which is punishable with imprisonment for a term not exceeding
six months;
(2) in the opinion of the Council, brings disrepute to the profession
or the Institute as a result of his action whether or not related to
E
his professional work.]
THE SECOND SCHEDULE
[See sections 21(3), 21B(3) and 22 ]
PART I
Professional misconduct in relation to chartered F
accountants in practice
A chartered accountant in practice shall be deemed to be guilty
of professional misconduct, if he –
(1) discloses information acquired in the course of his professional
G
engagement to any person other than his client so engaging him,
without the consent of his client or otherwise than as required by
any law for the time being in force;
(2) certifies or submits in his name, or in the name of his firm, a
report of an examination of financial statements unless the
H
490 SUPREME COURT REPORTS [2018] 2 S.C.R.

A examination of such statements and the related records has been
made by him or by a partner or an employee in his firm or by
another chartered accountant in practice;
(3) permits his name or the name of his firm to be used in
connection with an estimate of earnings contingent upon future
B transactions in a manner which may lead to the belief that he
vouches for the accuracy of the forecast;
(4) expresses his opinion on financial statements of any business
or enterprise in which he, his firm, or a partner in his firm has a
substantial interest;
C (5) fails to disclose a material fact known to him which is not
disclosed in a financial statement, but disclosure of which is
necessary in making such financial statement where he is
concerned with that financial statement in a professional capacity;
(6) fails to report a material misstatement known to him to appear
D in a financial statement with which he is concerned in a
professional capacity;
(7) does not exercise due diligence, or is grossly negligent in the
conduct of his professional duties;
(8) fails to obtain sufficient information which is necessary for
E
expression of an opinion or its exceptions are sufficiently material
to negate the expression of an opinion;
(9) fails to invite attention to any material departure from the
generally accepted procedure of audit applicable to the
circumstances;
F
(10) fails to keep moneys of his client other than fees or
remuneration or money meant to be expended in a separate
banking account or to use such moneys for purposes for which
they are intended within a reasonable time.
G PART II
Professional misconduct in relation to members of the
Institute generally
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of professional misconduct, if he—
H
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 491
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

(1) contravenes any of the provisions of this Act or the regulations A
made thereunder or any guidelines issued by the Council;
(2) being an employee of any company, firm or person, discloses
confidential information acquired in the course of his employment
except as and when required by any law for the time being in
force or except as permitted by the employer; B
(3) includes in any information, statement, return or form to be
submitted to the Institute, Council or any of its Committees,
Director (Discipline), Board of Discipline, Disciplinary Committee,
Quality Review Board or the Appellate Authority any particulars
knowing them to be false; C
(4) defalcates or embezzles moneys received in his professional
capacity.
PART III
Other misconduct in relation to members of the Institute D
generally
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of other misconduct, if he is held guilty by
any civil or criminal court for an offence which is punishable
with imprisonment for a term exceeding six months.
E
Regulation 3 of the Foreign Exchange Management
(Investment in Firm or Proprietory concern in India)
Regulations, 2000
“3. Restrictions on investment in a firm or a proprietary concern
in India by a person resident outside India F
Save as otherwise provided in the Act or rules or regulations
made or directions or orders issued thereunder, no person resident
outside India shall make any investment by way of contribution
to the capital of a firm or a proprietary concern or any association
of persons in india; G
Provided that the Reserve Bank may, on an application made to
it, permit a person resident outside India subject to such terms
and conditions as may be considered necessary to make an
investment by way of contribution to the capital of a firm or a
proprietary concern or any association of persons in India.” H
492 SUPREME COURT REPORTS [2018] 2 S.C.R.

A Clause 3.3.2 (III) of the Circular 2 of 2010 of the
Consolidated FDI (CFDI) Policy :
“3.3.2 FDI in Partnership Firm / Proprietary Concern:
(iii)Investment by non-residents other than NRIs/PIO: A person
resident outside India other than NRIs/PIO may make an
B application and seek prior approval of Reserve Bank for making
investment by way of contribution to the capital of a firm or a
proprietorship concern or any association of persons in India.
The application will be decided in consultation with the
Government of India.”
C Consideration of the Issue
44. The above resume of facts and pleadings shows the following:
i) There is a bar under CA Act to practice as CAs for a
company which includes a limited liability common
D partnership which has company as its partners.
ii) Code of Conduct for the CAs prohibits fee sharing,
advertisements but the MAFs by using international brands
and mixing other services with the services to be provided
as part of practice of chartered accountancy violate the
said Code of Conduct for which there is no regulatory
E
regime as the MAFs do not register themselves with ICAI.
Indian firms using similar brand names are registered with
the ICAI but the real entities being MAFs, ICAI is unable
to take requisite action for violation of Code of Ethics by
the MAFs. Thus, revisit of existing legal framework may
F become necessary so as to have an oversight mechanism
to regulate MAFs on the touchstone of Code of Ethics.
iii) Need for amendment of law to separate regulatory regime
for auditing services on the pattern of Sarbanse Oxley Act
enacted in US making a foreign public accounting firm
G preparing audit reports to be accountable to the Public
Company Accounting. Similar oversight body may need to
be considered in India.
iv) Section 29 of the CA Act provides that if a specified country,
prohibits persons of Indian domicile from becoming
H members of any institution similar to ICAI or practicing the
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 493
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

profession of accountancy or subjects them to unfair A
discrimination in that country, no subject of any such country
shall be entitled to become a member of the Institute or
practice the profession of accountancy in India.
v) FDI Policy and the RBI Guidelines framed under the FEMA
prohibit the investment by a person outside India to make B
investment by way of contribution to the capital of a firm or
a proprietary concern without permission of the RBI
vi) PwC Services BV Netherlands has made investments in
Indian firms. According to the petitioners, the investment is
also intended to acquire an audit firm through a circuitous C
route of giving interest free loans and further investments
are in the form of grants for enhancement of skills. Profit
sharing is in the form of licence fees/network charges.
According to the network, the partners are all Indian
partners and use of common brand name is only for uniform
standard and giving of grants is for maintaining the said D
standard. There was no investment by an entity outside
India. Nor it amounts to profit sharing by the Indian
accountancy firms with an entity outside India.
45. It is an undisputed fact that there are remittances from outside
India. The same could be termed as investment even though the E
remittances are claimed to be interest free loans to partners. The amount
could also be for taking over an Indian chartered accountancy firm.
Relationship of partnership firms, though having Indian partners, operating
under a common brand name from same infrastructure, with foreign
entity is not ruled out. It is not possible to rule out violation of FDI policies, F
FEMA Regulations and the CA Act. Thus, appropriate action may have
to be taken in pending proceedings or initiated at appropriate forum.
46. The investigation so far carried out cannot be held to be
complete in all respects. The investigation by income tax authorities is
only for assessment of income tax. Action by the ROC also does not G
cover the issue raised herein. The investigation by the ED is said to be
still pending, though several persons are said to have been examined and
documents collected, which are under scrutiny. The said investigation
relates to FEMA violations. The ICAI has initiated action with regard to
foreign remittances and is said to have written a letter dated 19th March,
2012 to the RBI to enquire whether investigation was conducted by the H
494 SUPREME COURT REPORTS [2018] 2 S.C.R.

A RBI. However, according to ICAI, its investigation can only be in respect
of members, registered with it, for the misconduct conducted by them.
The ICAI does not claim to have conducted complete investigation for
want of complete information into the issue whether the chartered
accountancy firms by receiving remittances from outside India or
remitting licence fee/network charges outside India have allowed
B
participation of a company or a foreign entity in the accountancy business
in violation of Section 25 of the CA Act and whether use of common
brand name by the network firms is in violation of reciprocity stipulated
under Section 29 of the CA Act. The ICAI should have taken the matter
to logical end, by drawing adverse inference, if information was withheld
C by the concerned groups.
47. No doubt, the report of the committee of experts of ICAI
dated 29th July, 2011 does not specifically name the MAFs involved,
groups A,B,C,D are mentioned. The ICAI ought to constitute an expert
panel to update its enquiry. Being an expert body, it should examine the
D matter further to uphold the law and give a report to concerned authorities
for appropriate action. Though the Committee analysed available facts
and found that MAFs were involved in violating ethics and law, it took
hyper technical view that non availability of complete information and
the groups as such were not amenable to its disciplinary jurisdiction in
absence of registration. A premier professionals body cannot limit its
E oversight functions on technicalities and is expected to play proactive
role for upholding ethics and values of the profession by going into all
connected and incidental issues.
48. Thus, a case is made out for examination not only by ED and
further examination by the ICAI but also by the Central Government
F having regard to the issues of violation of RBI/FDI policies and the CA
Act by secret arrangements.
49. It can hardly be disputed that profession of auditing is of great
importance for the economy. Financial statements audited by qualified
auditors are acted upon and failures of the auditors have resulted into
G scandals in the past. The auditing profession requires proper oversight.
Such oversight mechanism needs to be revisited from time to time. It
has been pointed out that post Enron Anderson Scandal, in the year
2000, Sarbanse Oxley Act was enacted in U.S. requiring corporate leaders
to personally certify the accuracy of their company’s financials. The
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S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED 495
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]

Act also lays down rules for functioning of audit companies with a view A
to prevent the corporate analysts from benefitting at the cost of public
interest. The audit companies were also prohibited from providing non
audit services to companies whose audits were conducted by such
auditors. Needless to say that absence of adequate oversight mechanism
has the potential of infringing public interest and rule of law which are
B
part of fundamental rights under Articles 14 and 21. It appears necessary
to realise that auditing business is required to be separated from the
consultancy business to ensure independence of auditors. The accounting
firms could not be left to self regulate themselves.
50. While we appreciate that it is for the policy makers to take a
call on the issue of extent to which globalization could be allowed in a C
particular field and conditions subject to which the same can be allowed.
Safeguards in the society and economy of the country in the process are
of paramount importance. This Court may not involve itself with the
policy making but the policy framework can certainly be looked at to
find out whether safeguards for enforcement of fundamental rights have D
been duly maintained. In the present context, having regard to the
statutory framework under the CA Act, current FDI Policy and the RBI
Circulars, it may prima facie appear that there is violation of statutory
provisions and policy framework effective enforcement of which has to
be ensured. Statutory regulatory provisions intended to advance the
object of law have to be enforced meaningfully. No vested interest can E
flout the same by manifesting compliance only in form. Compliance has
to be in substance. The law enforcing agencies are expected to see the
real situation. As found by the Expert Committee in its report, there is a
compliance by MAFs only in form and not in substance, by having got
registered partnership firms with the Indian partners, the real beneficiaries F
of transacting the business of chartered accountancy remain the
companies of the foreign entities. The partnership firms are merely a
face to defy the law. The principle of lifting the corporate veil has to
apply when the law is sought to be circumvented. In expanding horizons
of modern jurisprudence, it is certainly permissible. Its frontiers are
unlimited. The horizon of the doctrine is expanding. While the company G
is a separate entity, the Court has come to recognize several exceptions
to this rule. One exception is where corporate personality is used as a
cloak for fraud or improper conduct or for violation of law. Protection of
public interest being of paramount importance, if the corporate personality
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496 SUPREME COURT REPORTS [2018] 2 S.C.R.

A is to be used to evade obligations imposed by law, the real state of affairs
needs to be seen1. The same principle applies while overseeing the
compliance of applicable ethics of not permitting profit sharing or
complying with the ceiling limit for the business which is violated by
using the technique of sub contracts for outsourcing. If the premises
are same, phone number/fax number is same, brand name is same, the
B
controlling entity is same, human resources are same, it will be difficult
to expect that there is full compliance on mere separate registration of a
firm. The prohibition under Section 25 of the CA Act can be held to be
defeated. It is perhaps for this reason that the network firms avoided
giving the information sought by the Committee. The issue of separate
C oversight body for auditing work and updating existing legal framework
appear to be necessary.
51. The other aspect is of investment in CA firms, in violation of
prohibition of FDI policy, by using a circuitous route of interest free
loans to partners. The fact that the income tax authorities have taken
D the grants received as revenue receipts and taxed the same as such is
not conclusive to hold that the receipt is not an investment which is
impermissible. If investment is not permitted, the policy of law cannot
be defeated by terming such investment as grant for quality control
specially when the grant has been used to acquire a chartered accountancy
firm.
E
52. Absence of revisiting and restructuring oversight mechanism
as discussed above may have adverse effect on the existing chartered
accountancy profession as a whole on the one hand and unchecked
auditing bodies can adversely affect the economy of the country on the
other. Moreover, companies doing chartered accountancy business will
F not have personal or individual accountability which is required. Persons
who are the face may be insignificant and real owners or beneficiary of
prohibited activity may go scot free. As already noted, the Reports of
the Study Group and Expert Group show that enforcement mechanism
is not adequate and effective. This aspect needs to be looked into by
G experts in the Government. It may consider whether on the pattern of
the Sarbanse Oxley Act corporate leaders be required to personally certify
the accuracy of the financial statements. Further, how to prevent
1
State of Rajasthan vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. (2016) 4 SCC 469,
paras 24 to 28; State of Karnataka vs. Selvi J. Jayalalitha (2017) 6 SCC 263, paras 205
to 211
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corporate analysts from benefitting from the conflict of interests, how to A
check audit companies from providing non audit services and how to lay
down protocol for auditors. It has also been brought to our notice that
another law in US ‘Dodd-Frank Wall Street Reform and Consumer
Protection Act, 2010’ to ensure more transparency and accountability
of financial institutions to decrease the risk of investing needs
B
consideration. It sets up an oversight body called the Financial Stability
Oversight Council (FSOC).
53. Accordingly, we issue the following directions:
(i) The Union of India may constitute a three member
Committee of experts to look into the question whether and C
to what extent the statutory framework to enforce the letter
and spirit of Sections 25 and 29 of the CA Act and the
statutory Code of Conduct for the CAs requires revisit so
as to appropriately discipline and regulate MAFs. The
Committee may also consider the need for an appropriate
legislation on the pattern of Sarbanes Oxley Act, 2002 and D
Dodd Frank Wall Street Reform and Consumer Protection
Act, 2010 in US or any other appropriate mechanism for
oversight of profession of the auditors. Question whether
on account of conflict of interest of auditors with consultants,
the auditors’ profession may need an exclusive oversight E
body may be examined. The Committee may examine the
Study Group and the Expert Group Reports referred to
above, apart from any other material. It may also consider
steps for effective enforcement of the provisions of the
FDI policy and the FEMA Regulations referred to above.
It may identify the remedial measures which may then be F
considered by appropriate authorities. The Committee may
call for suggestions from all concerned. Such Committee
may be constituted within two months. Report of the
Committee may be submitted within three months thereafter.
The UOI may take further action after due consideration G
of such report.
(ii) The ED may complete the pending investigation within three
months;

H
498 SUPREME COURT REPORTS [2018] 2 S.C.R.

A (iii) ICAI may further examine all the related issues at
appropriate level as far as possible within three months and
take such further steps as may be considered necessary.
The matters stand disposed of accordingly.

B
Devika Gujral Matters disposed of.

C

D

E

F

G

H