34 Checklist Tax Audit Annexure i and II to Form No 3cd Revised 2008

Private & ConfidentialPrice Waterhouse

Client:

Tax Audit Year (Assessment Year) :Previous Year :

Checklist for Tax Audit Report u/s - Form 3CD - Annexure I & II

Requirements Compliance

No Reportable Issues

No Reportable Issues

Conclusions:

Preparer's Signature and Date:

Audit In-charge

Signature and Date:

Signature and Date:

Annexure I to Tax Audit Report u/s 44 AB of IT Act, 1961 - Form 3CD

Annexure II to Tax Audit Report u/s 44 AB of IT Act, 1961 - Form 3CD

General Instructions

Issue Sheet

(i) I have satisfied myself that the above checklists has been properly completed except as stated below.

(ii) All matters requiring the attention of Audit Partner are set forth in Audit Disposal Notes.

Review Manager (i) I have reviewed the work done by the assistant-in-charge and have satisfied myself that the above checklist have been satisfactorily completed.

(ii) Working Papers Reviewed(iii) Agree with the conclusions above

General Instructions

1 The home page contains the links to the detailed checklist of each Annexure responses and space for comments, if any, for the respective clauses. The conclusion column on the home page has a drop down menu for choosing the appropriate option.

2. Please select the name of the audit firm from the dropdown menu on the home page.Please fill in other details like name of client, audit period etc., The home page also contains affirmation as to work done, review made etc., Please fill in necessary details on completion and review of the checklist.

3. Critical matters and matters for reporting to management and other exceptions should be summarised in the 'Issue sheet' (last worksheet in the workbook). Issue sheet can also be accessed through the link on home page

4. Please complete the details as to prepared/reviewed by etc., on the individual checklist sheets. You can get back to home page from individual checklist sheet

5. The Responses column contains a drop down menu with possible responses. Please select the appropriate response from the options as applicable. Create a Working Paper for the work done under individual clauses. Specific representations, where required, should be obtained as a part of firm's standard representation letter.

6. This checklist cannot be construed as a substitute for the Guidance Note on Tax Audit, the Supplementary Guidance Note on Tax Audit and Changes thereto and Guidance Note on Audit of Fringe Benefits issued by ICAI. Reference should be made to the said Guidance Notes guidance and help in specific cases. A copy of these Guidance Notes are available in the ABAS India Technical Database.

Home

Name of the Client:Assessment Year:Completed by:Date:Reviewed by:

Date:

Checklist for Annexure-I to Tax Audit Report u/s 44 AB of IT Act, 1961 - Form 3CDSl No Audit Program Step/Record of Work done Compliance Remarks

Part A

CLAUSE 1: Name of the Assessee

Procedures

Yes

CLAUSE 2: Address

Procedures

Give the Registered Office Address YesCLAUSE 3: Permanent Account Number

Procedures

Yes

CLAUSE 4 : Status

Procedures

Yes

CLAUSE 5

Previous Year Ended March 31,

CLAUSE 6

Assessment Year –

Part B

Procedures

Code to be filled in accordance to the table provided YesPart B

Clauses 1 to 16

12

34 Secured loans5 Unsecured loans6 Current liabilities and provisions7 Total of Balance Sheet89 Gross profit

10 Commission received11 Commission paid12 Interest received13 Interest paid14 Depreciation as per books of account

Ascertain the name of the assessee from the incorporation documents (for eg. Certificate of incorporation, AOA and MOA)

Verify the number from the communication received from the Income Tax Department allotting the PAN

Ascertain from the communication received from the Income Tax Department

Nature of business or profession in respect of every business or profession carried on during the previous year

Paid-up share capital/capital of partner/proprietor

Share Application Money/Current Account of Partner or Proprietor, if any,

Reserves and Surplus/Profit and Loss Account

Gross turnover/gross receipts

Home

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Madhumathi: Please choose the relevant answer from the drop down box provided


15

16 Taxes on income paid/provided for in the booksProcedures

Yes

Sector(1) Manufacturing Industry

Sub Sector

Agro-based industries 101Automobile and Auto parts 102Cement 103Diamond cutting 104Drugs and Pharmaceuticals 105Electronics including Computer Hardware 106engineering Goods 107Fertilizers, Chemicals, Paints 108Four & Rice Mills 109Food Processing units 110Marble & Granite 111Paper 112Petroleum and Petrochemicals 113Power and energy 114Printing & publishing 115Rubber 116Steel 117Sugar 118Tea, Coffee 119Textiles, Handloom, Power looms 120Tobacco 121Tyre 122Vanasapati & Edible Oils 123Others 124

(2) Trading

Chain stores 201Retailers 202Wholesalers 203Others 204

(3) Commission Agents

General Commission Agents 301(4) Builders

Builders 401Estate agents 402Property Developers 403Others 404

(5) Contractors

Civil contractors 501

Net Profit (or loss) before tax as per Profit and Loss Account

State the figures as per the audited accounts for the previous year relevant to the Assessment year for which the tax audit is being performed

Code Table for the Nature of business or profession in respect of every business or profession carried on during the previous year

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Excise Contractors 502Forest Contractors 503Mining Contractors 504Others 505

(6) Professionals

Chartered Accountants, Auditors, etc. 601Fashion designers 602Legal Professionals 603Medical professionals 604Nursing Homes 605Specialty hospitals 606Others 607

(7) Service Sector

Advertisement agencies 701Beauty Parlours 702Consultancy Services 703Courier Agencies 704Computer Training/Educational and Coaching institutes 705Forex Dealers 706Hospitality services 707Hotels 708I.T. enabled services, BPO service provides 709Security Agencies 710Software development agencies 711Transporters 712Travel agents, tour operators 713Others 714

(8) Financial Service Sector

Banking Companies 801Chit Funds 802Financial Institutions 803Financial service providers 804Leasing Companies 805Money Lenders 806Non Banking Finance Companies 807Share Brokers, sub-brokers, etc. 808Others 809

(9) Entertainment Industry

Cable T.V. productions 901Film distribution 902Film laboratories 903Motion Picture producers 904Television Channels 905

Others 906

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Name of the Client:Assessment Year:Completed by:Date:Reviewed by:

Date:

Checklist for Annexure II to Tax Audit Report u/s 44 AB of IT Act, 1961 - Form 3CD Sl No Audit Program Step/Record of Work done Compliance Remarks

Checklist

1

Important Note:

2 100%

Procedures:

Yes

3 100%

Procedures:

Yes

Cross-refer with Clauses 16(b), 17(j) and 21(1)(A) of Form 3CD Yes

3A.

Yes

115WB(1)(a) - Any privilege, service, facility or amenity, directly or indirectly provided by an employer, whether by way of reimbursement or otherwise, to his employees (including former employee (s)

Section 115WC provides that the value of fringe benefits liable to FBT shall be the aggregate of fringe benefits referred to in Section 115WB(1)(b), (c), (d)and (2) only.Section 115WB(1)(d) is applicable from Assessment Year 2008-09 only

Therefore, any other fringe benefits though may be covered within the provisions of this sub-clause shall not be liable to FBT in the absence of any computational provisions

115WB(1)(b) - Free or concessional ticket provided by the employer for private journeys of his employees or their family members

Check the Company's policy in this regard and confirm that the expenditure incurred is subject to FBT to the extent it does not include leave travel concession or assistance received by an emplyee falling under the meaning of salary as defined in Section 17(1).

115WB(1)(c) - Any contribution by the employer to any approved Superannuation fund for employees (Please refer Note 1)

Check that all contributions to approved superannuation funds have been considered in this regard.

Notes: Contribution to Gratuity and Pension Fund (being statutory obligations) are not liable to FBT.

Applicable from Assessment Year 2008-09:115WB(1)(d) Any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees).

Check whether the value of the fringe benefit in respect of sweat equity shares and specified securities allotted by the employer to its employees including former employees has been computed in accordance with the provisions of section 115WC(1)(ba)

Note: For the full text of the Section and the related Valuation Rules, refer to Appendix A.

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4 115WB(2)(A) - Entertainment

Procedures: 20%Yes

5

Procedures:

Yes

Yes

Yes

Yes

6

Procedures: 20%Check the classification of the nature of conference expenses as:

Yes

b. Conferences at outside premises Yesc. Conferences by external agencies/event managers Yes

Yes

Note: Also see Answer to Q.51 by CBDT

Yes

Yes

Yes

Check whether FBT has been calculated for the following categories of Entertainment Expenditure in connection with exhibition, performance, amusement, game or sport, for affording amusement and gratification, including expenses incurred for employees on non festival occasions eg. Annual Day etc but excluding Independence day and Republic Day

115WB(2)(B) - Provision of Hospitality of every kind by the employer to any person (Please refer Note 2)

20% (Please refer Note 3)

In case of training, check whether the training was held in the Company's own training centre.

(a) If so, confirm that expenditure incurred on food and beverages in connection with such in-house training have not been included for computation of FBT (Ans. To Q.50 of CBDT)

(b) Where training is in hired premises, check whether the expenditure incurred on food and beverages has been included for calculation of FBT

Check whether the reimbursement of food and beverage costs to employees has been included for calculation of FBT

115WB(2)(C) - Conference (other than fee for participation by the employees in any conference) (Please refer Note 4)

a. Conference within the premises - for employees or for others

d. Expenditure on Seminars, Workshops and Training Programs

Check whether expenditure incurred for attending training programs organised by trade bodies or institutions has been charged to FBT

Check that the fees for participation in conferences by employees is not charged to FBT, unless the fees includes any expenditure referred to in Clause 115WB(2) (A), (B) and (D)to (P), i.e. entertainment, hospitality etc. Please also see Ans to Q.55 by CBDT

Check that all expenditure incurred for conferences is charged to FBT irrespective of whether the conference is of agents or dealers or development advisors or any other persons

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7

Procedures: 20%Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

115WB(2)(D) - Sales promotion including publicity (Please refer Note 5)

Check whether expenditure on sales promotion has been included for computation of Fringe Benefit Tax

Check whether expenditure on Brand Ambassador or Celebrity endorsement is charged to FBT

Check whether brokerage and selling commision paid for selling goods has not been charged to FBT

Check whether expenditure relating to salesmen appointed and employed by the Distributors, reimbursed through credit notes has not been charged to FBT

Check whether Sales discount or rebates allowed to wholesalers/customers, bonus points given to credit card customers etc are not charged to FBT

Check whether expenditure on incentives given to distributors for meeting quantity targets (including free goods), being a performance based commission, has not been charged to FBT

Check whether product marketing research expenses (where the research has been conducted through a separate marketing agency) are not charged to FBT

Check whether the product marketing research expenses when incurred by the employer's research through its own employees has been charged to FBT for the expenditure covered under Section 115WB(2)(A) to (P)

Check whether the expenditure in the nature of call centre charges for canvassing sales or carrying out post-sales activities has not been charged to FBT

Ensure that expenditure on distribution of free medical or other product samples has not been charged to FBTPlease refer Note 5(vii) and Ans. To Q.64 by CBDT

Check whether expenditure on making of ad-film is not charged to FBT

Check whether the following expenditure has been included for charging of FBT: (i) Expenditure on free offers (with products) such as freebies like tattoos, cricket cards or similar products, to trade or consumers (excluding employers) (ii) Expenditure incurred on the artwork or for payment of royalty charges in respect of such freebies

Check whether the expenditure incurred for the purposes of lodging and boarding or travel of customer/clients is charged to FBT

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8

Procedures: 20%Yes

Cross-refer with Clauses 16(b), 17(j) and 21(1)(A) of Form 3CD Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

115WB(2)(E) - Employees’ Welfare (Please refer Note 6)

Check that contribution to approved Gratuity Fund or Provident Fund is not charged to FBT (See Ans. To Q.38 by CBDT)

Check that contributions to Group Personal Accident/Workman Compensation Insurance (i.e. Statutory obligations) are not charged to FBT.(Note: Non statutory employee obligations are charged to FBT)

Check whether the Company's Medical reimbursement to its employees, upto Rs. 15000/- during the year, in an unapproved hospital (exempted under Section 17(1) is charged to FBT

Check that Medical reimbursement to employees, exceeding Rs. 15000/- during the year, in an unapproved hospital (which is taxed in the hands of employees) is not charged to FBT

Check that expenditure on Group Health Insurance or Group Medical Insurance or Group Life Insurance, is charged to FBT, where it is not a statutory obligation. In the case it is a stutuory obligation the same should not be taken for FBT.

Check whether expenditure incurred or payment made towards treating employees for injuries incurred during the course of employment at a hospital/dispensary not maintained by the employer is charged to FBT

Check, in the above instance, where the expenditure is in pursuance of a Statutory obligation or if the hospital/dispensary is run by the employer then the expenditure is not charged to FBT

Check whether subsidy provided to a school not meant exclusively for employees' children is charged to FBT

Check whether expenditure incurred on provision and maintenance of facilities like garden, site cleaning, light decoration, school, library, mess, television, cable connection etc. in employees colonies is charged to FBT

Check that expenditure incurred on provision of safety shoes or uniforms or equipments to the employees (including reimbursement of washing charges), has not been levied to FBT to the extent such expenditure is incurred to meet any statutory obligation (e.g. Employment Standing Orders Act, 1948)

Check whether reimbursement of expenditure on books and periodicals to employees is charged to FBT

Check whether expenditure incurred on prizes/rewards to employees for achievements is charged to FBT

Check whether expenditure incurred on transportation facility provided to children of employees is charged to FBT

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Yes

Yes

Yes

Notes:

9

Procedures:

Yes

Yes

Yes

Yes

Yes

Yes

Notes:

Check whether expenditure incurred on festivals (eg. Navratri, Diwali, Id, Christmas or New Year) is charged to FBT under Section 115W(B)(L)

Check whether expenditure incurred on non-festive employee get-togethers (eg. Annual Day etc) is charged to FBT under Section 115WB(2)(E)

Check that expenditure on celebration of Independence day or Republic Day is not charged to FBT

Expenditure incurred on premium for Keyman Insurance Policies is not Employee Welfare expense. If the policy is assigned after payment of certain premium and the policy vests in the employee, there is no expenditure at the time of assignment , and the difference between the Sum Assurred on the assigned value cannot be treated as an expense for employee welfare.

Contributions to unapproved Superannuation Funds are included under Section 115WB(2)(E) as Employee Welfare

Any expenditure incurred for employees, which is covered specifically under any other clause, cannot be considered here again

115WB(2)(F) - Conveyance, tour and travel (including foreign travel) (Please refer Note 7)


Check whether FBT has been charged by an employer company on its expenditure incurred on travelling, hotel etc. wholly and exclusively for executing an assignment for its client which reimburses the company for such 'out of pocket' expenses (Note: The Employer Company, not the client, is chargeable to FBT)

Check that expenditure incurred by a professional (eg. Lawyer or Tax Auditor) on conveyance, tour and travel and reimbursed by the client company is not charged to FBT in the hands of the client companyNote: The professional i.e. lawyer, auditor etc will be liable to FBT

Check that expenditure incurred by way of allowance to the employees (referred to in Section 10(14)(ii) and specified in Rule 2BB(2) -eg. Childrens' education allowance, transport allowance granted to employees) which are exempt in the hands of the employees are not charged to FBT

Check whether payment of leave travel concession or assistance to employees is charged to FBT to the extent it is not included in salary as defined in Section 17

Check whether rent paid or payable for hiring or leasing of motor cars has been charged to FBT as follows: (i) if under an operating lease,under Section 115WB(F).(ii) if under a finance lease under Section 115WB(2)(I)

Check that any benefit and amenity in the nature of free or subsidized transport or any such allowance provided by the employers to his employees for journeys by the employees to and fro from their residence to the place of work has not been charged to FBT (Refer Section 115WB(3) and also Ans. To Q.104 by CBDT)

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Only fare and travelling expenses are to be considered under Travelling expenses. Local conveyance at place visited is to be considered as conveyance.Hotel and lodging expenses are covered under Section 115WB(2)(G)

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10 115WB(2)(G) - Use of hotel, boarding and lodging facilities

Procedures:

Yes

Yes

11

Procedures:

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes


Check whether the per-diem allowances given to employees has been charged to FBT. (Note: However, employees will not be liable to pay income tax on any surplus accruing on such allowance.)

Check whether expenditure incurred for hotel stay, air ticket charges etc. in relation to customer/clients is charged to FBT (Section 115WB(2)(D) or (G))

Note: Expenditure incurred under Section is applicable for both employees and outsiders. Where hotels are booked on a continuous basis (i.e. for use during the year as and when the employees or representatives visit the hotel ) it is treated as a guest house

115WB(2)(H) - Repair, running (including fuel), maintenance of motor cars and the amount of depreciation thereon


Check whether the tax depreciation is taken on a prorata basis for estimating advance tax payable on fringe benefits

Check that expenditure on running and maintenance of motor cars is charged to FBT (Note: Employees will not be liable to income tax on the perquisite value of motor car provided by the employer (Rule 3(7)(vii) of the Income Tax Rules)

Check whether rent paid or payable for hiring or leasing of motor cars has been charged to FBT as follows: (i) if under an operating lease,under Section 115WB(F).(ii) if under a finance lease, under Section 115WB(2)(I)

Check whether the depreciation on motor car for the purposes of FBT is computed under the provisions of Section 32.

Check whether the amount of depreciation considered is the whole of the amount of depreciation in the relevant block of assets. (eg, for motor car, the amount of depreciation relating to the block should be included )

Check whether the expenditure by way of interest on loans taken for purchase of cars is charged to FBT

Check that expenditure on repair, running and maintenance of delivery/display vans, trucks/lorries, ambulances and tractors are not charged to FBT.Check whether salary paid to a driver of a motorcar or a pilot of an aircraft is charged to FBT

Check whether rent paid for garages or parking slots or airport tarmac or hangar charges is charged to FBT

Notes:Depreciation on assets attract FBT only in case of Motor Cars and Aircrafts. Companies giving their vehicles on hire are covered under employers engaged in business of carriage of passengers or goods by motor cars. Hotels maintaining motor cars for Airport transfer incur expenses on motor cars as an operational expense.

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12

Procedures:

Yes

Yes

13

Procedures: 20%Yes

Yes

14

Procedures: 20%Yes

Yes

Yes

Yes

Yes

15 115WB(2)(L) - Festival celebrations

Procedures: 50%

Yes

Yes

Yes

16 115WB(2)(M) - Use of health club and similar facilities

Procedures: 50%Yes

115WB(2)(I) - Repair, running (including fuel) and maintenance of aircrafts and the amount of depreciation thereon


Check whether salary paid to a driver of a motorcar or a pilot of an aircraft is charged to FBT

Check whether rent paid for garages or parking slots or airport tarmac or hangar charges is charged to FBT

Note: The value of Fringe Benefit is nil for employers engaged in the business of carriage of passengers or goods by aircrafts.

115WB(2)(J) - Use of telephone (including mobile phone) other than expenditure on leased telephone lines

Check whether expenditure incurred or payment made for use of telephone (including mobile phone) other than expenditure on leased telephone lines is charged to FBT.

Check whether expenditure on use of telephones (including mobile phones) installed in the office is charged to FBT.Note: This charging to FBT is irrespective of whether the telephone is in the name of the company or not and whether payment for its use is made directly or indirectly by the Company

115WB(2)(K) - Maintenance of any accommodation in the nature of guest house other than accommodation used for training purposes

Check that expenditure on capital items (eg. Fridge, TV) in a guest house is not charged to FBT, either by way or cost or depreciation

Check whether rent paid for maintenance of a guest house is charged to FBT

Check whether expenditure on all guest houses, irrespective of whether they are used as holiday homes are charged to FBT

Check whether the following expenditure has been charged to FBT: (i)expenditure on provision of food at the guest house maintained by the employer, (ii) contract charges paid to guest house staff and (iii) rent of a guest house building

Check that depreciation on a guest house is not charged to FBT

Check whether expenditure incurred on festivals (eg. Navratri, Diwali, Id, Christmas or New Year) is charged to FBT under Section 115W(B)(L)

Check whether expenditure incurred on non-festive employee get-togethers (eg. Annual Day etc) is charged to FBT under Section 115WB(2)(E)

Check that expenditure on celebration of Independence day or Republic Day is not charged to FBT

Check whether expenditure incurred for subscription to or for payment made for Health Club or Fitness Centre is charged to FBT

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17 115WB(2)(N) - Use of any other club facilities

Procedures: 50%Yes

Yes

Yes

18 115WB(2)(O) - Gifts

Procedures: 50%Yes

19 115WB(2)(P) - Scholarships

Procedures: 50%Yes

20

Procedures: 5%

Check whether payments made to clubs (entrance fee, membership, subscription or other services) are charged to FBT to the extent they are not treated as perquisites in the hands of the employees

Check that depreciation on a club building is not charged to FBT

Check whether the payment of entrance or membership fee of a club or health club or similar facility is charged to FBT

Note: Residing in a club or hotel should be considered in 115WB(2)(G) and not under payment to clubs

Check whether the following categories of Gifts have been charged to FBT:(i) gifts under trade schemes also for promotion of Company's products including gifts to customers and employees; and (ii) gifts to employees on the occasion of their marriage.

Note: Gifts in kind are valued at the cost to the employer

Check whether all expenditure pertaining to scholarships including expenditure on (i) employees or their relatives' education and (ii) scholarships incurred irrespective of whether the recipient is an employee or his relative or any other person has been charged to FBT

115WB(2)(Q) - Tour and Travel (including foreign travel) (Please refer Note 12)

Note: Expenditure under this head has been charged to FBT under Section 115WB(2)(F) upto Asst Year 2007-08

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Important Definitions & Notes

Definition of Employer [Section 115W(a)]:

Applicability of FBT [Section 115WB):

The provisions of the charging Section are laid out under Item Nos 1 to 20 in the Checklist given below.Notes:

A. The particulars to be given under each Item given below include:

(i) expenditure/payment as recorded in the books of account and debited to :

(a) P & L Account (b) Assets Other than Advances

(c) Advances (Note: Payment of advance for expenses is not subject to FBT)

(d) Any other Head (ii) Deduction/recoveries (for each type of expenditure/payment) (iii) Perquisites paid or payable by the employer

(iv) Percentage of expenditure/payment being fringe benefits

(v) Value of Fringe benefits (Derived from the above figures)B. These expenses, whether provided by the employer or deemed to be provided by the employer are liable to FBT

Notes to Annexure II:

1

Expenditure on hospitality does not include the following:-

(i) any expenditure on, or payment for, food or beverage provided by the employer to his employees in office or factory;

(ii) any expenditure on, or payment through paid vouchers which are not transferable and usable only at eating joints or outlets.

3

4

5 The following expenditure on advertisement shall not be considered as expenditure on sales promotion including publicity -

(i)

(ii) the expenditure on the holding of, or the participation in any press conference or business convention, fair or exhibition,

(iii)

(iv)

(v)

(vi) the expenditure by way of payment of any advertising agency for the purposes of clauses (i) to (v) above.

(vii)

- Company (including a foreign company which has employees based in India), a Firm, an AOP, a BOI, any Local Authority and Artificial juridical person

Eg pre-operative expenses, Capital Work in Progress, Deferred Revenue Expenditure, Any other Head (where expenses have been incurred and account is squared up because of reimbursement by others)

C. The Heads of Account in the General Ledger as referred to in the Sections given below are to be scruitnised & test checks applied to ascertain whether such expenditure are incurred in this regard.

D. These expenses are also to be cross-verified with the workings for TDS on Salary and the Return of Salary filed (Annexure II under the Income Tax Rules, 1962) to confirm that no expense which falls under "Salary" as defined under Section 17(1) is charged to FBT

For assessment year 2007-08 and subsequent assessment years, the value of fringe benefits in respect of contribution by the employer to an approved superannuation fund shall be the amount of contribution which exceeds one lakh rupees in respect of each employee

2

In the case of an employer engaged in the business of hotel 5% shall be substituted for 20%. In addition to this, in the case of an employer engaged in the business of carriage of passengers or goods by aircraft or by ship 5% shall be substituted for 20% for assessment year 2007-08 and subsequent assessment years.

For the purposes of this clause, any expenditure on conveyance, tour and travel (including foreign travel), on hotel or boarding and lodging in connection with any conference shall be deemed to be expenditure incurred for the purposes of conference.

the expenditure (including rental) on advertisement of any form in any print (including journals, catalogues or price lists) or electronic media or transport system,

the expenditure on sponsorship of any sport event or any other event organized by any Government agency or trade association or body,

the expenditure on the publication in any print or electronic media of any notice required to be published by or under any law or by an order of a court or Tribunal,

the expenditure on advertisement by way of signs, art work, painting, banners, awnings, direct mail, electric spectaculars, kiosks, hoardings, bill boards, display of products(with effect from Assessment Year 2008-09), or by way of such other medium of advertisement,

being the expenditure on distribution of samples either free of cost or at concessional rate (with effect from A/Y 2008-09);and

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(viii)

6

7

8

9

10

11

12 This clause is applicable for assessment year 2007-08 and subsequent assessment years.

Definitions:

Hotel:

Building or part of building where residential accomodation is, by way of business, provided for a monetary consideration

Member's Club:

Residential accomodation provided at a Club can be contended as a hotel by the employer and taxed accordingly

Restaurant:

Guest House:

A place maintained to entertain the guests of the assessee gratuitously

Business of Construction:

Manufacture:

A process where the commodity changes its substantial identity during such processing

Production:

Pharmaceuticals:

Science or study of drugs including their preparation and properties and uses (or) relating to pharmacy.

Computer software:

As defined in Clause (b) to Explanation to Section 80HHE and explanation 2 to Section 10A of the Act as given below:

Other Notes

1 For dates of payment of advance tax reference should be made to section 115WJ of the Income Tax Act, 1961.

the expenditure by way of payment to any person of repute for promoting the sale of goods or services of the business of the employer (not to be considered as expenditure on sales promotion, including publicity for assessment year 2007-08 and subsequent assessment years).

For the purposes of this clause, any expenditure incurred or payment made to fulfil any statutory obligation or mitigate occupational hazards or provide first aid facilities in the hospital or dispensary run by the employer shall not be considered as expenditure for employees’ welfare

For assessment year 2007-08 and subsequent assessment years, clause (F) of sub-section (2) of section 115WB refers to expense on ‘conveyance’.

In the case of an employer engaged in the business of construction, or in the business of manufacture or production of pharmaceuticals or computer software, 5% shall be substituted for 20%.

In the case of an employer engaged in the business of manufacture or production of pharmaceuticals or computer software, 5% shall be substituted for 20%. Besides, in the case of an employer engaged in the business of carriage of passengers or goods by aircraft or by ship 5% shall be substituted for assessment year 2007-08 and subsequent assessment years.

In the case of an employer engaged in the business of carriage of passengers or goods by motor car, 5% shall be substituted for 20%.

In the case of an employer engaged in the business of carriage of passengers or goods by aircraft, ‘Nil’ shall be substituted for 20%.

Any premises in which business of sale of food or drink to the public is carried on. A restaurant in a hotel would be covered under the definiton of hotel.

Continuous and systematic exercise of activity (usually alteration or repairs or erection of roads, bridges, dams, canals, etc) with a motive to profit, transacted between two persons involving a twin activity

Process involving bringing into existence new goods by a process which may or may not amount to manufacture, including all by-products, intermediate products and residual products which emerge in the course of manufacture of goods.

Any computer programe recorded on an information storage device or any customised electronic data or any product or service of similar nature transmitted or exported from India to a place outside India by any means

In addition, Notification No. SO 890 (E) dated 26.09.2000 also defines the IT enabled products or services which are included in this regard. (Eg Back office operations, Call Centres, Animation, Data Processing etc)

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Appendix A

Extracts from the Income Tax Act, 1961:

Applicable from Assessment Year 2008-09:Section 115WB(1)(d) :Any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees).

Explanation- For the purpose of this clause,-

i) "Specified security" means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation)Act, 1956(42 of 1956) [and , where employee's stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme];

ii) "Sweat equity shares" means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions,by whatever name called.

Section 115WC(1)(ba): For the purposes of this Chapter, the value of fringe benefits shall be the aggregate of the following, namely:—............(ba) the fair market value of the specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB, on the date on which the option vests with the employee as reduced by the amount actually paid by, or recovered from, the employee in respect of such security or shares.

Explanation.—For the purposes of this clause,—

(i) “fair market value” means the value determined in accordance with the method as may be prescribed by the Board(CBDT); (see Rules 40C and 40D of the Income Tax Rules reproduced below)

(ii) “option” means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price

Recovery of fringe benefit tax by the employer from the employee. Section 115WKA: Notwithstanding anything contained in any agreement or scheme under which any specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB has been allotted or transferred, directly or indirectly, by the employer on or after the 1st day of April, 2007, it shall be lawful for the employer to vary the agreement or scheme under which such specified security or sweat equity shares has been allotted or transferred so as to recover from the employee the fringe benefit tax to the extent to which such employer is liable to pay the fringe benefit tax in relation to the value of fringe benefits provided to the employee and determined under clause (ba) of sub-section (1) of section 115WC.

Section 115WKB:(1) Where an employer has paid any fringe benefit tax with respect to allotment or transfer of specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB, and has recovered such tax subsequently from an employee, it shall be deemed that the fringe benefit tax so recovered is the tax paid by such employee in relation to the value of the fringe benefit provided to him only to the extent to which the amount thereof relates to the value of the fringe benefit provided to such employee, as determined under clause (ba) of sub-section (1) of section 115WC. (2) Notwithstanding anything contained in any other provisions of this Act, where the fringe benefit tax recovered from such employee is deemed to be the tax paid by such employee under sub-section (1), such employee shall, under this Act, not be entitled to claim-i) any refund out of such payment of tax; or ii) any credit of such payment of tax against tax liability on other income or against any other liability.

Extracts from the Income Tax Rules, 1962:PART VIIC - Fringe benefit tax - Valuation of specified security or sweat equity share being a share in the company

(4) For the purpose of this rule,—

(e) “specified date” means,—

(i) the date of vesting of the option; or

(f) “equity share” shall have the meaning assigned to it in section 85 of the Companies Act, 1956 (1 of 1956).

Valuation of specified security not being an equity share in the company.

Rule 40C:(1) For the purposes of clause (ba) of sub-section (1) of section 115WC, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option vests with the employee, shall be determined in accordance with the provisions of sub-rule (2) or sub-rule (3).

(2) In a case where, on the date of the vesting of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange :

Provided that where, on the date of vesting of the option, the share is listed on more than one recognized stock exchanges, the fair market value shall be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share :

Provided further that where, on the date of vesting of the option, there is no trading in the share on any recognized stock exchange, the fair market value shall be—

(a) the closing price of the share on any recognised stock exchange on a date closest to the date of vesting of the option and immediately preceding such date; or

(b) the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of vesting of the option and immediately preceding such date, is recorded on more than one recognized stock exchange.

(3) In a case where, on the date of vesting of the option, the share in the company is not listed on a recognized stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date.

(a) “closing price” of a share on a recognised stock exchange on a date shall be the price of the last settlement on such date on such stock exchange:

Provided that where the stock exchange quotes both “buy” and “sell” prices, the closing price shall be the “sell” price of the last settlement.

(b) “merchant banker” means Category I merchant banker registered with Security and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(c) “opening price” of a share on a recognised stock exchange on a date shall be the price of the first settlement on such date on such stock exchange:

Provided that where the stock exchange quotes both “buy” and “sell” prices, the opening price shall be the “sell” price of the first settlement.

(d) “recognised stock exchange” shall have the same meaning assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(ii) any date earlier than the date of the vesting of the option, not being a date which is more than 180 days earlier than the date of the vesting;

Rule 40D:For the purposes of clause (ba) of sub-section (1) of section 115WC, the fair market value of any specified security, not being an equity share in a company, on the date on which the option vests with the employee, shall be such value as determined by a merchant banker on the specified date.

Explanation. - For the purposes of this rule, "merchant banker" and "specified date" shall have the meanings assigned to them in clause (b) and clause (e) respectively of sub-rule (4) of rule 40C.

Price WaterhouseAssessment Year:Completed by:Date:Reviewed by:Date:Clause Ref. Area/Requirement Brief Description of the Issue How addressed in the AuditAnnexure IPart A

Clause 1Clause 2Clause 3Clause 4Clause 5Clause 6

Part BClause 1Clause 2Clause 3Clause 4Clause 5Clause 6Clause 7Clause 8Clause 9

Clause 10Clause 11Clause 12Clause 14Clause 15Clause 16

Annexure IISection

115WB(1) (b)115WB(1) (c)115WB(1) (d)115WB(2) (A)115WB(2) (B)115WB(2) (C)115WB(2) (D)115WB(2) (E)115WB(2) (F)115WB(2) (G)115WB(2) (H)115WB(2) (I)115WB(2) (J)115WB(2) (K)115WB(2) (L)115WB(2) (M)115WB(2) (N)115WB(2) (O)115WB(2) (P)115WB(2) (Q)

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34 Checklist Tax Audit Annexure i and II to Form No 3cd Revised 2008