Geographical Indications – Intellectual Property Rights Laws and Practices Important Questions

Geographical Indications – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
Who are the beneficiaries of the registration of geographical indications? (5 marks)
Answer:
As per Section 11 of the Geographical Indications of Goods (Registration & Protection) Act, 1999, registered proprietors of geographical indication like any association of persons, producers, organization, or. authority established by or under the law is the beneficiaries of geographical indications. The Applicant has to be a legal entity and should be representing the interest of producers of the goods applied for. Any such organization or association that is not that of the producers may have to prove that they represent the interest of producers. Any Applicant Authority also has to prove that they represent the interest of producers.

Question 2.
Explain the criminal remedies in case of infringement, piracy, or falsification of Gl under the Geographical Indications of Goods (Registration and Protection) Act,1999?
Answer:
A registered geographical indication is infringed by a person who, not being an authorized user thereof uses such geographical indication by any means in the designations or presentation of goods that indicates or suggests that such goods originate in a geographical area other than the true place of origin of such goods in a manner which misleads the persons as to the geographical origin of such goods. Hence the infringement of registered G.l. occurs if a person:

  1. Uses the G.l. on the goods or suggests that such goods originate in a geographical area other than the true place of origin of such goods in a manner which misleads the public; or
  2. Uses the G.l. in a manner that constitutes an act of unfair competition; or
  3. Uses another G.l. to the goods in a manner, which falsely represents to the public that the goods originate in the territory, region, or locality in respect of which such registered G.l. relates.

Chapter VIII of the Geographical Indication of Goods (Registration and Protection) Act, 1999 lays down provisions regarding certain offenses, Penalties and the Procedure to be followed thereof.

The legislature has taken a strong view of the cases of infringement, piracy, falsification, misrepresentation and has made them penal offenses under the Act. The chapter apart from listing penalties for the above-mentioned offenses also details the penalty and procedure to be followed in the prosecution of such offenses.

The following are the acts deemed as offenses:
In the context of offenses, what constitutes the meaning of “applying geographical indication has been dealt with in section 37 and the expression geographical indication has been defined in Section 2 (1) (e).
Section 38 lists two kinds of offenses namely:-

(1) Falsifying a Gl and
(2) Falsely applying a Gl.

  • The penalty for falsification of GIs and the circumstances in which a person applies false Gl are enumerated in Section 39.
  • Selling goods to which false Gl is applied as outlined in Section 40,
  • Enhanced Penalty for subsequent convictions for the offenses of falsifying, falsification of GIs, or selling goods with false GIs.
  • Falsely representing a Gl as registered as listed in Section 42. Misrepresenting the Gl as registered, which has not been actually registered is made an offense.

Question 3.
Geographical indications are the new WTO compatible measure to protect well-known traditional knowledge and established trade name. Discuss with reference to Alphonso mango case.
Answer:
Alphanso Mango from Ratnagiri, Sindhudurg, and other adjoining areas in Maharashtra, finally got the status (and thus the legal protection) of a Geographical Indication (Gl) Tag. A Geographical Indication or a Gl is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to their origin. Such a name conveys an assurance of quality and distinctiveness which is essentially attributable to its origin in that defined geographical locality. Darjeeling Tea, Mahabaleshwar Strawberry, Blue Pottery of Jaipur. Banarasi Sarees and Tirupati Laddus are some of the GIs.

Gl products can benefit the rural economy in remote areas, by supplementing the incomes of artisans, farmers, weavers, and craftsmen. Our rural artisans possess unique skills and knowledge of traditional practices and methods, passed down from generation to generation, which needs to be protected and promoted. Recently, Union Minister of Commerce and Industry, Suresh Prabhu, launched the logo and tagline for the Geographical Indications (Gl) of India and said that the Gl will give the rightful share in the intellectual property to the artisan and the place of origin of the product. He emphasized that it’s an area of strength and optimism for India, whereby the Gl tag has given protection to a large number of hand-made and manufactured products, especially in the informal sector.

The Department of Industrial Policy and Promotion has also taken several initiatives in this regard and is actively involved in the promotion and marketing of GIs with a vision to enhance the horizon, both socially and economically for Gl producers.

The king of mangoes, Alphonso, better known as ‘Hapus’ in Maharashtra, is in demand in domestic as well as the international markets not only for its taste but also for pleasant fragrance and vibrant color. It has long been one of the world’s most popular fruits and is exported to various countries including Japan, Korea, and Europe. New markets, such as the USA and Australia have been recently opened up for it. The first product to get a Gl tag in India was the Darjeeling tea in 2004 and there are a total of 325 products from India that carry this indication/recognition.

Question 4.
(b) Texas-based Rice Tec Inc. claimed that their invention pertains to a novel breed of rice plants and grains therefore UPSTO granted the patent on ‘Basmati Rice Lines and Grains’ in September 1997 after three years of examination and accepted all the 20 claims put forward by Rice Tec Inc. What was the consequence when India challenge the patent and why patent granted to three hybrid varieties Bas 867, RTI 1117 and RT.1121.
Answer:
In the case of a patent granted to Rice Tec Inc., an American private company based in Texas, India challenged the grant of patent in the US. Basmati rice, sought-after for its fragrant taste, was developed by Indian farmers over hundreds of years, but the Texan company Rice Tec obtained a patent for a cross-breed with American long-grain rice. Rice Tec was granted the patent on the basis of aroma, elongation of the grain on cooking, and chalkiness. Although, the Indian government filed 50,000 pages of scientific evidence to the US Patents and Trademarks Office, insisting that most high-quality basmati varieties already possess these features. The US Patent and Trademarks office accepted the petition and will re-examine its legitimacy.

The patent – granted only in the US – provided Rice Tec control over basmati rice production in North America. Farmers had to pay a fee to grow the rice and were not permitted to plant the seeds to grow the following year’s crops. India feared the patent may severely damage exports from its own farmers to the US. India has also objected to Rice Tec calling the rice ‘basmati’, insisting the name should be used only for rice grown in the Basmati region of India. The Indian government claimed like status for basmati rice as that granted to Champagne, Cognac, and Scotch whisky.

A team of agricultural scientists screened several research papers, reports, and proceedings of seminars, conferences, symposia, journals, newspapers, and archives for relevant supporting information to establish the existence of prior art in this area in India.

The documentary evidence against the claim Nos. 15, 16, and 17 of the company for novelty were so strong that Rice Tec had to withdraw these claims. The company further withdrew 11 claims. Hence, only five of Rice Tec’s original 20 claims survived the Indian challenges. The patent granted simply gives three hybrid varieties Bas 867 RT 1117 and RT 1121. The new rice has nothing to do with basmati. Importantly, none of the claims granted by the patent pertain to basmati rice as a generic category. Also, the Rice Tec. application was for a patent and not for basmati as a trademark, so there is no question of Rice Tec getting exclusive rights to use the term basmati. The patent granted, Hence, neither prevents Indian Basmati from being exported to the US nor puts it at a disadvantage in the market.

Question 5.
Kalyan is a non-profit statutory trust in Andhra Pradesh situated in salubrious surroundings in a rural area. Employing about 14,000 persons, Kalyan produces a special kind of puri using resources peculiar to the area and adopting cooking skills particular to the area. The cooks preparing the puri had developed culinary skills, whose descent could be traced to their ancestors over more than 500 years. Villagers and even outsiders visiting the area savor the special taste of the puri and even get addicted to it. Kalyan is also under the obligation to administer and maintain the trust property and to cater to the needs of the cooks and workmen. Puri is offered at subsidized rates to the customers and has gained a great reputation and distinctiveness over a long period.

Kalyan applied for the registration of geographical indication (GI) for its puri under the Geographical Indications of Goods (Registration and Protection) Act, 1999 (the Act). After following the procedure laid down, the Registrar of Geographical Indications granted registration sought by Kalyan in its favor. In doing so, the procedural formalities contemplated under the said Act and Rules made thereunder were strictly adhered to and the genuineness of the product {puri) was verified by duly appointed experts. The product was classified as ‘foodstuff under the Act. Kalyan, thus, became the registered proprietor.

At the time of the grant of Gl to puri, there were no objections from anyone when the matter was published in the Gl Journal. Thus, there was no pre¬grant opposition to the grant of Gl to puri. But yet, after the grant of Gl, one large foodstuff dealer filed a rectification application alleging that granting of Gl tag for pur/contravened Section 11(1) of the Act and Rules made thereunder and that the said geographical indication was prohibited for registration under Section 9(a) of the Act.

Further, the rectification applicant alleged that there was no industrial purpose served by the grant and that granting a monopoly to a single producer would defeat the very purpose for which the Act was brought into force. Section 11 of the Act refers to ‘any association of persons or producers or any organization or authority established by or under any law for the time being in force representing the interest of producers of the concerned goods and therefore a single producer was not entitled to the grant of Gl. Moreover, the applicant claimed that puri was like any other similar puri made throughout the country and hence the use (consumption) of puri by customers would likely deceive or cause confusion attracting Section 9(a) of the Act. It was prayed by the applicant that the grant of Gl to puri be removed from the Register of Geographical Indications.

Furthermore, the rectification applicant opposed the grant of Gl to puri on the ground that it did not fall under the definition of goods in Section 2(1 )(f) of the Act.

Kalyan (respondent) objected to the locus standi of the applicant stating that the rectification applicant was in no way offended by the registration and that he never objected when the matter was published in the Gl journal before the Registrar of Gl granted the registration to puri. Kalyan contended that the term ‘producers’ mentioned in Section 11 of the Act represents both singular and plural. Interpretation of the term should be done in the light of Section 13(2) of the General Clauses Act, 1897. Producers would include a single producer. Further, the respondent argued that it had the. inherent statutory and equitable rights to fence its intellectual prop^fty. The geographical indication registration was acquired to make the public aware of the Gl tag granted to puri produced by the trust (Kalyan) and to protect them from unauthorized sales. The product was rightly classified, as foodstuff under section 2(1 )(f) of the Act.

Kalyan further opposed the rectification application on the ground that Section 9(a) of the Act prohibited the registration of Gl which would be likely to deceive or cause confusion and that in the case of puri, there was no such confusion and misleading the public. On the other hand, the rectification applicant failed to explain how the registered product would cause confusion. Kalyan argued that the essence of Gl was not only to protect the interest of manufacturers but also that of consumers who were willing to pay more for a genuine product. The legislative intent was to protect the interest of the producers and general public from imitation and consequently with puri having a well-known reputation, the producer (Kalyan) was having every right to fence the product by getting eligible intellectual property protection.

The Registry of Geographical Indications sent notice to both parties. The rectification applicant led no evidence nor did he produce any document, in his favor.

Based on the above, answer the following questions:
(1) Whether the rectification applicant has the locus standi to institute the rectification proceedings against the registered geographical indication puri? Whether the rectification applicant is an aggrieved person?

(2) Whether there was any violation of Section 11 of the Act, in particular with reference to puri being produced by a single producer, Kalyan, and whether puri falls under the definition of ‘goods’ as per Section 2(1 )(f) of the Act?

(3) Whether the rectification applicant had established its case for rectification, particularly in the light of Section 9(a) of the Act?
Answer:

(1) The respondent/registered proprietor (Kalyan) had raised its preliminary objections regarding the maintainability of the rectification application challenging the locus standi of the applicant. Under section 27(1 j of the Gl Act, 1999 read with Rule 65 of the Rules made thereunder, an aggrieved person alone has the right to file a rectification application with the Registrar or the Appellate Board, as the case may be. The section, in particular, authorizes only ‘an aggrieved person, to apply for canceling or varying the registration of a geographical indication on the ground of any contravention or failure to observe the condition entered on the register in relation thereto by the holder of the Gl. A person cannot file a rectification application challenging the registration of Gl unless he can prove his grievances on account of the registration. In the present case, the rectification. the applicant failed to establish as to how he was prejudiced by the registration of the Gl. On the other hand, it is the duty of the rectification applicant to set out fully the. nature of his interest in the registered product.

The rectification applicant was unsuccessful in satisfying the tribunal on this issue of his interest towards the registered Gl. From the averments made in the rectification application, it is apparent that the rectification applicant is a third party and not involved in the same trade or manufacturing a similar Gl product. Therefore, it can be safely concluded that the applicant “lacks standing” to bring an action of this nature and has also failed in proving his locus standi to seek rectification in the registered Gl. The issue is not in favor of the rectification applicant on the ground that he is not an aggrieved person and also not having any interest in the registered Gl.

(2) It has been alleged in the rectification application that Sections 11(1) and 2(1 )(f) of the Act and Rules made thereunder was violated in the grant of Gl to Kalyan, raising an issue that the respondent was the sole producer of the product and therefore, it does not fall within the ambit of Section 11(1). Under section 11(1) of the Act, any association of persons or producers or any organization or authority established by or under any law for the time being in force representing the interest of the producers of the goods may make an application for Gl registration. The respondent/registered proprietor is a statutory trust in the State of Andhra Pradesh and therefore falls within the scope of Section 11 (1) of the Act read with Section 2(1 )(k) thereof, as a ‘person’ and ‘producer’ and the said entity is entitled to make an application for Gl registration for any product subject to proving that it represents the interest of producers of the particular product.

The rectification applicant mentioned that granting of Gl tag to Puri contravened the essential condition for grant of Gl under section 11 (1) of the Gl Act. It further alleged that there was no industrial purpose served by the grant and that such grant shall result in monopoly to a single producer. According to the rectification applicant, Kalyan, being a single producer was not entitled to the grant of Gl and that each and every person involved in the manufacturing of the product is deemed to be a producer of the product and that Puri is not manufactured by the efforts of a single person. It is a product emerging from the effort of employees of Kalyan and Kalyan represents the producers under section 11 (1) of the Act.

The terms ‘producers’ mentioned in Section 11(1) of the Act includes both its singular as well as the plural form. The interpretation of the term should be done in the light of Section 13(2) of the General Clauses Act, 1897 and thus read in that context Kalyan is eligible to apply for Gl registration for its Puri under section 11 (1) of the Act.

The rectification applicant has questioned the classification of Puri as goods under section 2(1 )(f) of the Act. The said section defines ‘Goods’ as ‘any agricultural, natural or manufactured goods or any goods of handicraft or of industry and includes foodstuff. Thus in terms of the said definition, Puri falls within the definition of ‘Goods’ under section 2(1 )(f) of the Gl Act.

(3) Section 9(a) of the Act prohibits the registration of a Gl which would be likely to deceive or cause confusion. In the case of Puri, there is no such confusion or deception of the public. The facts of the case also show that the rectification applicant failed to explain how the registered product will cause confusion in the mind of the public. The essence of the grant of right over Gl is not only to protect the interest of manufacturers but also that of the consumers who are willing to pay more for a genuine product. The legislative intent is to protect the interests of the producer as well as the general public from any imitation of the product. Puri has a well-known reputation and the producer has every right to fence the product by getting eligible Intellectual property protection.

Regarding the applicant’s contention that production of Puri and grant of Gl for Puri shall serve no industrial purpose for which the Act was brought into force, carries no force, as it is evident from the facts of the case that Puri was being manufactured by a large workforce and was therefore serving an industrial purpose. As the skills involved were unique and particular to the place of origin (the area where the trust is located and the area where the culinary skills of the cooks exist having descended from their ancestors), grant of Gl to Puri was done only after following the procedure established by law and after the genuineness of the product was verified by duly appointed experts. Gl is granted to an applicant only after he satisfies the requirements of Section 11 (1) of the Act. The Act does not prohibit the grant of monopoly in respect of a product; rather the intent is to grant the protection to a Gl in order to protect the interest of the manufacturer as also the customers against non-genuine products.

Therefore, it can be safely concluded that the rectification applicant has failed to establish his claim for rectification.

Question 6.
Read and analyze the case study and answer the questions given at the end :
India is the world’s largest producer of tea, with a total production of 846 million kgs in the year 2002, supplying about 31 percent of the world’s favorite hot drink. Among the teas grown in India, Darjeeling tea offers distinctive characteristics of quality and flavor, and also has a global reputation for more than a century. Broadly Speaking, there are two factors that have contributed to such an exceptional and distinctive taste, namely geographical origin and processing, Darjeeling tea has been cultivated, grown, and produced in tea gardens in a well-known geographical area – the Darjeeling district in the Indian State of West Bengal – for over one and a half centuries. The tea gardens are located at elevations of over 2000 meters above mean sea level.

Even though the tea industry in India lies in the private sector, it has been statutorily regulated and controlled by the Ministry of Commerce since 1933 under various enactments culminating in the Tea Act, 1953. The tea Board of India (Tea Board) was set up under this Act. A major portion of the annual production of Darjeeling tea is exported, the key buyers being Japan, Russia, the United States, United Kingdom, and other European Union (EU) Countries such as France, Germany, and the Netherlands.

Efforts made by the Tea Board to ensure the supply of genuine Darjeeling tea In order to ensure the supply and genuine Darjeeling tea, a compulsory system of certifying the authenticity of exported Darjeeling tea was incorporated into the Tea Act, 1953 in February 2000. The system makes it compulsory for all the dealers in Darjeeling tea to enter into a license agreement with the Tea Board of India on payment of an annual license fee. The terms and conditions of the agreement provide, inter alia, that the licensees must furnish .information relating to the production and manufacture of Darjeeling tea and its sale, through auction or otherwise.

The Tea Board is thus able to compute and compile the total volume of Darjeeling tea produced and sold in the given period. No blending with teas of other origin is permitted. Certificates of origin are then issued for export consignments under the Tea (Marketing and Distribution Control) Order, 2000, read with the Tea Act, 1953. Data are entered from the garden invoices (the first point of movement outside the factory) into a database and the issue of the Certificate of Origin authenticates the export of each consignment of Darjeeling tea by cross-checking the details. The customs authorities in India have instructed, by circular, all customs checkpoints to check for the certificates of origin accompanying the Darjeeling tea consignments and not to allow the export of any tea as ‘Darjeeling’ without this certificate. This ensures the sale-chain integrity of Darjeeling tea until consignments leave the country.

Legal Protection at Domestic Level Certification Trade Marks Registration
In order to provide legal protection in India, Tea Board registered the “‘Darjeeling logo’ and also the word ‘Darjeeling’ as Certification Trade Marks (CTMs) under the Trade and Merchandise Marks Act, 1958 (now the Trade Marks Act, 1999).

Gl Registration
The Tea Board has also applied for the registration of the words ‘Darjeeling’ and ‘Darjeeling logo’ under the Geographical Indications of Goods (Registration and Protection) Act, 1999 (the Act) which. came into force with effect from 15th September 2003, in addition to the CTMs mentioned above.

Under the Act:
(1) No person shall be entitled to institute any proceeding to prevent or recover damages for the infringement of unregistered geographical indications.

(2) A registration of geographical indications shall give to the registered proprietor and all authorized users whose names have been entered in the register the right to obtain relief in respect of infringement of the geographical indications. However, authorized users alone shall have the exclusive right to the use of the geographical indications in relation to the goods in respect of which the geographical indications are registered.

(3) A registered geographical indication is infringed by a person who, not being an authorized user thereof,

  • Uses such geographical indications by any means in the designation or presentation of goods that indicates or suggests that such goods originate in some other geographical area other than the true place of origin of the goods in a manner which misleads the public; or
  • Uses any geographical indications in such a manner which constitutes an act of unfair competition including passing off in respect of registered geographical indications; or
  • Uses another geographical indication to the goods which, although literally true as to the territory, region, or locality in which the goods originate, falsely represents to the public that the goods originate in the region, territory, or locality in respect Of which such registered geographical indications relate.

(4) The purpose of the Global Indications of Goods (Registration and Protection) Act, 1999 is to create a public register, and

(5) The Act confers public rights.
Status of registration of Global Indications (Gl):
The Registration of the marks applied for by the Tea Board has not yet been granted. The Registrar has, however, after examining the application for registration filed by the Tea Board advertised for any expression of opposition. It is only after considering opposition if any, that the Registrar may decide to register the Gl of the Tea Board. Reasons for Gl protection at domestic level and export markets The reasons for the need for additional protection for Glover and above the

CTM has been set out by the chair of the Tea Board as follows :

  • When CTM registration is not accepted in a jurisdiction where protection is sought, for example, France for Darjeeling;
  • Because Gl registration is necessary to obtain reciprocal protection of a mark mandate under EU Regulation 2081/92; and
  • Registration gives clear status to a Gl, indicating a direct link with geographical origin.

Quite apart from the aforesaid reasons the Act in India has also been enacted in order to comply with its obligation under the Agreement on Trade-Related Aspects, of’ Intellectual Property Rights (TRIPS), which requires WTO members to enact appropriate implementation legislation for Gl.

Steps were taken at the international level

1. Registration of Darjeeling tea and logo:
In order to protect ‘Darjeeling’ and ‘Darjeeling logo’ as Gl, the Tea Board registered the mars in various countries, including the United States, Canada, Japan, Egypt, United Kingdom, and some other European countries, as a trademark/CTM. In this context, it is relevant to note that on 3rd August 2001 the UK Trade Registry granted registration of the word ‘Darjeeling’ as of 30th March 1998 under the UK Trade Marks Act, 1994. The United States has also accepted the application of the Tea Board for the registration of ‘Darjeeling’ as a CTM in October 2002.

2. The appointment of the International Watch Agency:
In order to prevent misuse of ‘Darjeeling’ and the logo, the Tea Board has since 1998 hired the services of Compumark, a worldwide watch agency. Compumark is required to monitor and report to the Tea Board all cases of unauthorized use and attempted registration. Pursuant to Compumark’s appointment, several cases of attempted registrations and unauthorized use of ‘Darjeeling’ and Darjeeling Logo have been reported.

3. The assistance of overseas buyers:
In order to ensure the supply of genuine Darjeeling tea, the Tea Board has sought the help of all overseas buyers, sellers, and Tea Councils and Associations insofar as they should insist on certificates of origin to accompany all export consignments of Darjeeling tea.

Local and external players and their roles
The Tea Board, the sole representative of tea producers in India, is responsible for the implementation of the government’s regulations and policies. It is vested with the authority to administer all stages of tea cultivation, processing, and sale (including the Darjeeling segment) through various orders issued by the government. It works in close co-operation with the Darjeeling Planters Association, which is the sole producers’ forum for Darjeeling tea. Both the Tea Board and the Darjeeling Planters Association (DPA) have been involved at various levels in protecting and defending the Darjeeling tea’ and ‘Darjeeling logo’. The primary objects are

  • to prevent misuse of the word ‘Darjeeling’ for tea sold worldwide;
  • to deliver the correct product to the consumer;
  • to enable the commercial benefit of the equity of the brand to reach the Indian tea industry and ultimately the plantation worker;
  • to achieve an international status similar to champagne or Scotch whisky in terms of both brand and equity and governance/ administration.

The Tea Board assumed the role of the complainant in making and filing an opposition or other legal measures whenever cases of unauthorized use or attempted or actual registration of Darjeeling and Darjeeling logo was brought to its notice. Such legal measures and generally taken where negotiation is filed. For instance, in February 2000 in Japan, the Tea Board filed an opposition against Yutaka Sang yo Kabushiki Kaisa of Japan for registration of the trademark ‘Darjeeling Tea’ with the map of India, the International Tea KK of Japan for registration of Darjeeling Women device in Japan underclass 30/42 (tea, coffee, and cocoa) and against Mitsui Norin KK for the use in advertising of the ‘Divine Darjeelin’ logo. These opposing parties defended the invalidation action filed against them.

Some disputes relating to Darjeeling tea have been settled through negotiation undertaken by the Tea Board of India with the foreign companies concerned with the help of their respective governments. Thus, the Tea Board with the help of the Indian Government continues to negotiate with France at various levels over the activities of the French trademark authorities. Moreover BULGARI, Switzerland agreed to withdraw the legend ‘Darjeeling’ Tea fragrance for men’ pursuant to legal notice and negotiations.

In one of the cases in France, the Tea Board put the applicant Comptoir des Parfums (which advertised in March 1999) on notice, and drew its attention to the prior rights and goodwill in the name of Darjeeling as the Gl for tea, requiring it to withdraw its application voluntarily, Based on the correspondence, the applicant consented to the amendment of all specifications of goods by the addition of ‘all those goods being made of Darjeeling tea or recalling the scent of Darjeeling tea’. The amendment proposed by the applicant was found by the examiner to be descriptive of the goods in question.

‘The Tea Board of India feels that a partnership with the buyers in the major consuming countries such as Germany, Japan, and the United Kingdom would be the only long term solution to the problem of possible passing off’. However, it strongly opposes any attempt at individual registration in the case of private labels or their misuse in specific overseas jurisdictions. Challenges faced and the outcome The Tea Board has faced a series of hurdles, challenges, and difficulties in the protection and enforcement of the word ‘Darjeeling’ and of the Darjeeling logo. Some of the major challenges faced by the Tea Board’s effort to protect ‘Darjeeling’ and the Darjeeling logo in Japan, France, Russia, the United States, and other countries are given below :

(i) Unauthorized use and registration of Darjeeling Tea and logo in Japan In the first case the Tea Board filed an invalidation action against International Tea KK, a Japanese company, over the registration of the Darjeeling logo mark, namely, Darjeeling Women ‘serving tea/coffee/coca/soft drinks/fruit juice’ in the Japanese Patent Office (JPO) on 29,h November 1996 with the trademark registration number 3221237. The impugned registration was made notwithstanding the registration in Japan of the identical Darjeeling logo mark by the Tea Board, with the trademark registration number 2153113, dated 31st July 1987.

The Tea Board also filed a non-use cancellation action. On 28th August 2002, the JPO Board of Appeal held that the pirate registration was invalid because it was contrary to public order and morality. With regard to the Tea Board’s non-use cancellation action, the JPO decided that International Tea KK had not furnished sufficient evidence to substantiate its use of registration and thereby allowed the appeal of the Tea Board.

In the second case, the Tea Board opposed the application for ‘Divine Darjeeling’ in class 30 (Darjeeling tea, coffee, and cocoa produced in Darjeeling, India) filed by Mitsui Norin KK of Japan advertised on 29th February 2000. The opposition was mainly on three grounds, namely

  • ‘Divine’ is a laudatory term and accordingly the mark for which protection is sought is mere “Darjeeling1, which is clearly non-distinctive;
  • ‘Divine Darjeeling’ is misleading insofar as ‘coffee and cocoa produced in Darjeeling’ are concerned, all the more so because the district of Darjeeling does not produce coffee or cocoa;
  • Darjeeling tea qualifies as a geographical indication under international conventions including TRIPS and ought to be protected as such in Japan, a member of TRIPS.

The JPO Opposition Board dismissed the invalidation action filed by the Tea Board of India primarily on the ground that the marks ‘Divine Darjeeling’ as a whole was not misleading or descriptive of the quality of goods. However, the non-use cancellation action succeeded, because the registered proprietor was not able to place on record adequate evidence to prove the use of the mark in Japan.

In yet another case, the Tea Board brought an invalidation action against the Japanese trademark registration of ‘Darjeeling tea’ with a map of India in class 30 by Yutaka Sangyo Kabushiki Kaisa, on the ground that the registration was contrary to public order and morality. This action was rejected on the ground that ‘the written English characters “Darjeeling tea” and the map of India for the goods of Darjeeling tea are used as an indication of the origin and quality of Darjeeling tea and will not harm the feelings of the Indian people’. However, the non-use cancellation action filed by the Tea Board succeeded, because the registered proprietor was not able to place on record sufficient evidence to prove the use of the mark in Japan.

A perusal of these decisions reveals that the JPO did not decide the contention of the Tea Board relating to the TRIPS Agreement, which requires WTO members to provide the legal means to prevent the use of a Gl for goods originating in a geographical area other than the true place of origin in a manner which misleads the public to constitute an act of unfair competition. Indeed, non-disposal of the argument that the procedural guidelines of WTO be followed dilutes the effect of the TRIPS Agreement.

Other instances of defending Gl against developed countries
(1) France:
While the Indian system protects French GIs, France on the other hand does not extend similar or reciprocal protection to Indian GIs. Thus French law does not permit any opposition to an application for a trademark similar or identical to a Gl if the goods covered are different from those represented by the Gl. The owner of the Gl can take appropriate judicial proceedings only after the impugned application has proceeded to registration.

The net effect of such a provision has been that despite India’s protests, Darjeeling has been misappropriated as a trademark in respect of several goods in class 25, namely, clothing, shoes, and headgear. The French Examiner – even though he found evidence in favor of the Tea Board of India (i) on sufficient proof of use of ‘Darjeeling’ tea in France, and (ii) that the applicant had slavishly copied the name Darjeeling in its application – held that the respective goods ‘clothing, shoes, headgear’ and ‘tea’ are not of the same nature, function and intended use,.produced in different places and sold through different networks.

The Examiner also held that even if the applicant has slavishly copied the Tea Board’s Darjeeling logo (being the prior mark), the difference in the nature of the respective goods is sufficient to hold that the applicant’s mark may be adopted without prejudicing the Tea Board’s rights in the name ‘Darjeeling’.

In another case, the Tea Board opposed the application against the advertised marks for Darjeeling in classes 5, 12, and 28 by Dor Francois Marie in France. The French Examiner rejected the Tea Board’s opposition and held that the respective goods did not (i) have the same nature, function, and intended use; and (ii) share the same distribution circuits. However, he held that although the applicant’s mark constituted a partial reproduction of the Tea Board’s prior figurative registration for the Darjeeling logo, the designated goods lacked similarity to that of the Tea Board’s prior marks, and the logo, therefore, may be used as a trademark without prejudicing the prior rights of the Tea Board.

(2) Russia:
The Tea Board filed an application for unauthorized use by a company of the word ‘Darjeeling’. This application was objected to on the ground of conflict with an earlier registration of the identical word by a company named ‘Akotus’. The Russian Patent Office overruled the objection and accepted the application of the Tea Board for the word ‘Darjeeling’.

(3) United States:
The Tea Board is opposing an application filed by its licensee in the United States to register’Darjeeling nouveau’ (‘nouveau’ is the French for ‘new’) relating to diverse goods and services such as clothing, lingerie, Internet services, coffee, cocoa and so on in respect of first flush Darjeeling tea. The registration application is under consideration even though ‘Darjeeling’ is already registered under US CTM law.

(4) Other Countries:
In several cases, the Tea Board opposed attempted registration and unauthorized use of the word ‘Darjeeling’ in Germany, Israel, Norway, and Sri Lanka before the Patent Office of the country concerned.

Costs of Protection and enforcement for the Industry and the Government
Another major challenge faced by the Tea Board relates to legal and registration expenses, costs of hiring an international watch agency, and fighting infringements in overseas jurisdictions.

Thus during the last four years, the Tea Board has spent approximately US$ 2,00,000 for these purposes. This amount does not include administrative expenses including the relevant personnel working for the Tea Board, the cost of setting up monitoring mechanisms, software development costs, and so forth. It is not possible for every geographical indication right holder to incur such expenses protection. Further, like overseeing, monitoring, and implementing Gl protection, the high cost of taking legal action can prevent a country from engaging a lawyer to contest the case, however genuine and strong the case may be. Moreover, a lack of expertise in the proper handling of highly complex legal language is another challenge to be met.

Lessons for Others
The Tea Board appears to be not satisfied with the policy as well as the approach of the patent authority in Japan and France. In order to deal with the situations described above, India, along with several other member countries of the WTO, wants to extend the proposed register for Gl to include products or goods, other than wines and spirits, which may be distinguished by the quality, reputation or other characteristics essentially attributable to their geographical origin.

The main advantage would be to develop a multilateral system of notification and registration of all geographical indications. In this connection, a joint “paper has recently been submitted to the TRIPS Council. The Doha Ministerial Declaration under Paragraphs 12 and 18 also provides a mandate for the issue of providing a higher level of protection to GIs to products other than ‘wines and spirits’ to be addressed by the TRIPS Council. According to the Tea Board, (i) extension of protection under Article 23 for products other than wines and spirits in required where no legal platform exists to register a Gl or a CTM which is a TRIPS obligation, for example, Japan; (ii) once the scope of protection is extended it would not be necessary to establish the credentials/reputation of a Gl before fighting the infringement of similar ‘types’, ‘styles’, or ‘look-alikes’, and (iii) additional protection would rectify the imbalance created by the special protection of wines and spirits.

The experience in defending Gl in France, the United States, and Japan further strengthen the Tea Board’s perspective on the subject. Despite registration of ‘Darjeeling’ as a Gl in France, the Tea Board was unsuccessful in defending it because French law does not permit any opposition to an application for a trademark, similar or identical to a Gl. Likewise, India’s efforts to protect Darjeeling’ in Japan did not succeed because the prefix ‘Divine’ has not gained currency in the Japanese language. From the experiences described above, it is felt that it is high time to evolve a rule that no application for registration of a Gl of the same or similar goods or products or even similar type, style, or look-alike already registered in that country be ordinarily entertained by the competent authority of the country concerned.

Further, the Gl status and apprehended or actual violation of Gl should be published at both domestic and international levels. Moreover, adequate steps should be taken to evolve rules and procedures for Gl or CTM registration in all the member countries of the WTO. This would prevent conflict to a great extent. Finally* a vigilance cell should be established to check the violation and misuse of the Gl of any product.
Questions :
(1) How does ‘Darjeeling Tea’ satisfy the criteria of geographical indications under the Geographical Indication of Goods (Registration and Protection) Act, 1999?
Why was a compulsory system of certifying the authenticity of exported Darjeeling Tea incorporated into the TEA ACT, 1953 in 2000?
(2) In case the Government of India is interested to protect the ‘Darjeeling Tea’ under the Geographical Indications of Goods (Registration and Protection) Act, 1999, how can an application be filed, and what should be the contents of the application? Explain in the context of the case study.
(3) Elaborate on the unauthorized use and registration of Darjeeling Tea and logo in Japan and defending Gl against developed countries.
(d) What was Doha Ministerial Declaration under Paragraphs 12 and 18 and what did Tea Board experience in defending Gl in France, the USA, and Japan?
(4) What are the initiatives taken by the Tea Board of India to ensure geographical indications (Gl) protection to ‘Darjeeling Tea ‘? What measures would you suggest to pave way for enhanced protection of Intellectual Property Rights (IPRs) in the context of ‘Darjeeling Tea’?
Answer:
(1) The term “Geographical Indication” is defined in Section 2(1 )(e) of the Geographical Indications of Goods (Registration and Protection) Act, 1999 as: “Geographical Indication, in relation to goods, means an indication which identifies such goods as agricultural goods, natural goods or manufactured goods as originating, or manufactured in the territory of a country, or a region or locality in that territory, where a given quality, reputation or another characteristic of such goods is essentially attributable to its geographical origin and in the case where such goods are manufactured goods one of the activities of either the production or of processing or preparation of the goods concerned takes place in such territory, region or locality, as the case may be.”

In the case of Darjeeling Tea, the key features which make it eligible to be granted registration and thus protected under the Gl Act, 1999 are:

  • It offers distinctive characteristics of quality and flavor.
  • It has had a global reputation for more than a century.
  • It has been cultivated grown and produced in tea gardens in a well-known geographical area — the Darjeeling district in the Indian State of West Bengal for over one and a half centuries.
  • It has tea gardens which are located in the district of Darjeeling at elevations of over 2000 meters above sea level.

In order to ensure the supply of genuine Darjeeling tea, a compulsory system of certifying the authenticity of exported Darjeeling tea was incorporated into the Tea Act, 1953. in the month of February 2000. The system made it compulsory for all the dealers of Darjeeling tea to enter into a license agreement with the Tea Board of India on payment of an annual license fee. The terms and conditions of the agreement provide, inter alia, that the licensees must furnish information relating to the production and manufacture of Darjeeling tea and its sale, through auction or otherwise. The Tea Board is thus able to compute and compile the total volume of Darjeeling tea produced and sold in the given period. No blending with teas of other origin is permitted.

Certificates of origin are then issued for export consignments under the Tea (Marketing and Distribution Control) Order, 2000, read with the Tea Act, 1953. Data is entered from the garden invoices (the first point of movement outside the factory) into a database, and the issue of the certificate of origin authenticates the export of each consignment of Darjeeling tea by cross-checking the details. Furthermore, the Customs Authorities under their circular has made it mandatory to check at each checkpoint the Certificate of Origin in respect of each Darjeeling Tea Consignment. Thus, ensuring the sale-chain integrity of Darjeeling Tea until the consignment leaves the country.

(2) Filing of Application

  • An application for the registration of a Geographical Indication by the Government of India can be made in triplicate in Form Gl – 1(A) for a single class and in Gl -1 (C) for multiple classes.
  • A Convention Application shall be made in triplicate in Form Gl -1 (B) for a single class and in Gl.-1 (D) for multiple classes. ‘
  • Power of Attorney, if required.
  • The application shall be signed by the applicant or his agent.
  • The application is to be made to the Registrar of Geographical Indications.

Contents of Application
As provided in Section 11 of the Gl Act, 1999, an application for registration of a Gl should include the requirements and criteria for processing a Gl application as specified below:

  • A statement as to how. the geographical indication serves to designate the goods as originating from the concerned territory of the country or region;
  • The class of goods to which the GI shall apply;
  • The geographical map of the territory or locality in which goods originate or are manufactured;
  • The particulars of appearance of the geographical indication;
  • Particulars of the producers;
  • An affidavit of how the applicant claims to represent its interest in the Gl;
  • The standard benchmark for the use or other characteristics of the Gl;
  • The particulars of special characteristics;
  • Textual description of the proposed boundary;
  • The growth attributes in relation to the Gl pertinent to the application;
  • Three certified copies of the map of the territory, region, or locality;
  • Particulars of special human skill involved, if any;
  • Full name and address of the association of persons or organization seeking registration;
  • Number of producers; and,
  • Particulars of inspection structures, if any, to regulate the use of the Gl. [Rule 32].

On receipt of the application, a number is allotted. Thereafter, the examiner scrutinizes the application to check whether it meets the requirements of the Gl Act and the Rules. Deficiencies, if any, found through a preliminary examination would be communicated by the Examiner to the Applicant. The deficiencies need to be complied with, the time limit mentioned in the communication. [Rule 31] Upon compliance with the deficiencies, the Registrar shall ordinarily constitute a Consultative Group of experts (not more than seven representatives) to ascertain the correctness of the particulars furnished in the Statement of Case.

The Consultative Group is chaired by the Registrar of Geographical Indications. [Rule 33] After issuance of the Examination Report, submissions of the applicant would be considered. If no further objection is raised, the application would be accepted and published (within three months of acceptance) in the Geographical Indications Journal. [Rule 34 & Rule 38] After advertisement of a Geographical Indication in the Geographical Indications Journal, any person may within three months oppose the registration of an application for G I. This period may be extended by a period, not exceeding one month, by making an application to the Registrar along with the prescribed fee. Such an application for extension shall be filed before the expiry of the period of three months. The Notice of Opposition shall be filed only before the Registrar of Geographical Indications at Chennai. [Section 14, Form GI-2]

(3) In a case, the Tea Board had filed an invalidation action against International Tea KK, a Japanese Company, over the registration of the Darjeeling logo mark, namely, Darjeeling women ‘serving tea/coffee/coca/soft drinks/fruit juice1 in the Japanese Patent Office (JPO) on 29lh November 1996 with the trademark registration number 3221237. The impugned registration was made notwithstanding the registration in Japan of the identical Darjeeling logo mark by the Tea.1 Board of India, with the trademark registration number 2153713, dated 31st July 1987. The headboard had also filed a non-use cancellation action. On 28th August* 2002, the JPO Board of Appeal had held that the pirate registration was invalid because it was contrary to public order and morality. With regard to the Tea Board’s non-use cancellation action, the JPO decided that International Tea KK had not furnished sufficient evidence to substantiate its use of registration and thereby allowed the appeal of the Tea Board.

In another case, the Tea Board had filed its opposition in respect of an application for registration of ‘Divine Darjeeling’ under class 30 (Darjeeling Tea, Coffee and Cocoa product in Darjeeling, India) filed by Mitsui Norin KK of Japan advertised on 29th February 2000. The grounds of opposition were:

  • ‘Divine’ is a laudatory term and accordingly the mark for which protection is sought is mere ‘Darjeeling’, which is clearly non-distinctive;
  • ‘Divine Darjeeling’ is misleading insofar as ‘coffee and cocoa’ products in Darjeeling’ are concerned, all the more so because the district of Darjeeling does not produce coffee or cocoa;
  • Darjeeling tea qualifies as a geographical indication under international conventions including TRIPS and ought to be protected as such in Japan, a member of TRIPS.

The Opposition application filed by Tea Board was however dismissed by the JPO Opposition Board stating that the mark ‘Divine Darjeeling’ as a whole was not misleading or descriptive of the quality of goods. In yet another case, the Tea Board brought an invalidation action against the act of trademark registration of ‘Darjeeling tea’ with the map of India in class 30 by a Japanese company, Yutaka Sangyo Kabushiki Kaisa, on the ground that the registration was contrary to the public order and morality. The action was however rejected on the ground that ‘the written English characters ‘Darjeeling tea’ and ‘Map of India’ for the goods of Darjeeling tea are used as an indication of the origin and quality of Darjeeling tea and will not harm the feelings of the Indian People’. However, the non-use cancellation action filed by Tea Board succeeded, because the registered proprietor was not able to place on record sufficient evidence to prove the use of the mark in Japan.

A perusal of these decisions reveals that the JPO did not decide the contention of the Tea Board of India relating to the TRIPS Agreement, which requires WTO members to provide the legal means to prevent the use of a Gl for goods originating in a geographical area other than the true place of origin in a manner which misleads the public to constitute an act of unfair competition. Indeed, non-disposal of the argument that the procedural guidelines of WTO be followed dilutes the effect of the TRIPS Agreement.

Indian Legal System protects French GIs, while France on the other hand does not extend similar or reciprocal protection to Indian GIs. Thus, French law does not permit any opposition to be made to an application for registration of a trademark similar or identical to a Gl if the goods covered are different from those represented by the G I. The owner of the Gl can take appropriate judicial action only after the impugned application has proceeded for registration. The net effect of such a provision has been that despite India’s protests, ‘Darjeeling’ has been misappropriated as a trademark in respect of several goods in class 25, namely, clothing, shoes, and headgear in France. The French Examiner — even though he found evidence supporting the case made out by the Tea Board of India:

  • On sufficient proof of use of ‘Darjeeling’ tea in France, and
  • That the applicant had slavishly copied the name ‘Darjeeling’ in its application – held that the respective goods falling in the category of ‘clothing, shoes, headgear’ and ‘tea’ respectively are not of the same nature, function and intended use, produced in different places and sold through different networks.

The Examiner also held that even if the applicant has slavishly copied the Tea Board’s Darjeeling logo (being the prior mark), the difference in the nature of the respective goods is sufficient to hold that the applicant’s mark may be adopted without prejudicing the Tea Board’s rights in the name ‘Darjeeling’.

Russia:
The Tea Board had filed an application for unauthorized use by a company of the trademark ‘Darjeeling’. This application was objected to on the ground of conflict with an earlier registration of the identical word by a company named ‘Akorus’. The Russian Patent Office overruled the objection, and accepted the application of the Tea Board of India for the use of the trademark ‘Darjeeling’. United States: In a case, the Tea Board was opposing an application filed by its licensee in the United States to register ‘Darjeeling nouveau’ (‘nouveau’ is the French for ‘new’) relating to diverse goods and services such as clothing, lingerie, Internet services, coffee, cocoa and so on in respect of first flush Darjeeling tea. The registration application is under consideration even though ‘Darjeeling’ is already registered under US CTM law.

Other Countries:
Quite apart from the above, in several cases, the Tea Board of India opposed attempted registration and unauthorized use of the word ‘Darjeeling’ in Germany, Israel. Norway and. Sri Lanka before the Patent Office of the country concerned. (d) Paragraphs 12 and 18 of the Doha Ministerial Declaration relate to the extension of the additional protection for Geographical Indications to products other than ‘Wines’ and Spirits. According to paragraphs 12 and 18 of the Doha Ministerial Declaration and the decision of the Trade Negotiation Committee (TNC) of 1st February 2002, the issue of ‘extension’ of the protection of Geographical Indications for ‘Wines’ and ’Spirits’ to Geographical Indications for other products shall be addressed in the regular meetings of the TRIPS Council on a priority basis. Paragraphs 12 and 18 thus provide a mandate for the issue of “providing a higher level of protection to GIs to products other than ‘wines and spirits’ to be addressed by the TRIPS Council”. According to the Tea Board,

(i) Extension of protection under Article 23 for products other than wines and spirits is required where no legal platform exists to register a Gl or a CTM which is a TRIPS obligation, for example, Japan;
(ii) Once the scope of protection is extended it would not be necessary to establish the credentials/reputation of a Gl before fighting the infringement of similar ‘types’, ‘styles’, or look-alikes’; and”
(iii) Additional protection would rectify the imbalance created by the special protection of Wines and Spirits.
Despite the registration of ‘Darjeeling’ as a Gl in France, the Tea Board was unsuccessful in defending it because French law does not permit any opposition to an application for a trademark, similar or identical to a Gl. Likewise, India’s efforts to protect ‘Darjeeling’ in Japan did not succeed because the prefix ‘Divine’ has not gained currency in the Japanese language.

It is felt that it is high time to evolve a rule that no application for registration of a Gl of the same or similar goods or products or even similar type, style or look-alike already registered in that country be – ordinarily entertained by the competent authority of the country concerned Further, the Gl status and apprehended or actual violation of Gl should be published at both domestic and international levels. Moreover, adequate steps should be taken to evolve rules and procedures for Gl or CTM registration in all the member countries of the WTO. This would prevent conflict to a great extent. Finally, a vigilance cell should be established to check the violation and misuse of the Gl of any product.

(e) The Tea Board of India took the following initiatives to ensure Geographical Indication (Gl) Protection to ‘Darjeeling Tea’:
(i) The Compulsory system of certifying the authenticity of exported Darjeeling tea. With this, it has made it compulsory for all the dealers in Darjeeling tea to enter into a license agreement with the Tea Board of India.
(ii) The Tea Board registered the ‘Darjeeling logo’ and also the word ‘Darjeeling’ as Certification Trade Marks (CTMs) under the (Indian) Trade and Merchandise Marks Act, 1958 (now the ‘Trade Marks Act, 1999’).
(iii) The Tea Board of India has also applied for the registration of the words ‘Darjeeling’ and ‘Darjeeling logo’ under the Geographical Indications of Goods (Registration and Protection) Act, 1999.
(iv) In order to protect ‘Darjeeling’ and ‘Darjeeling logo’ as a Gl, the Tea Board of India registered the marks in various countries.
(v) The Tea Board hired the services of a worldwide agency COMPUMARK, to check and prevent the misuse of the ‘Darjeeling’ and Darjeeling logo. For example, a company called Bulgari’ from Switzerland agreed to withdraw its application to use the tag ‘Darjeeling Tea fragrance for- men’. Several such cases were settled through negotiations.

(vi) The Tea Board has sought the help of all overseas buyers, sellers, and Tea Council and Associations to insist on Certificates of Origin to accompany all export consignments of Darjeeling tea. To protect against the violations of its Intellectual Property Rights, an organization should ensure the protection of its trade secrets in a foreign country also. Every company has to take certain important and crucial measures to ensure the protection of its trade secrets.

It may be prudent for the companies to conduct an intellectual property audit to identify the protectable business information. This will help the companies to assess the value of the information useful for their business. The intellectual property audit is the starting point for the development of a trade secrets protection program.

Once the audit is complete, the next step is to determine the appropriate level of security necessary to protect different types of trade secrets. If a trade secret is well protected, there is no term of protection. Trade secret protection can, in principle, extend indefinitely and in this respect offers an advantage over patent protection, which, lasts only for a specified period.

The Tea Board of India feels that a partnership with the buyers in the major consuming countries such as Germany, Japan, and the United Kingdom would be the only long-term solution to the problem of possible passing off.’ However, it strongly opposes any attempt at individual registration in the case of private labels or their misuse in specific overseas jurisdictions. Governments of several countries working together have a prominent role to play in resolving disputes. Recently, India and the United States have led the way in this regard by establishing “an annual high-level Intellectual Property (IP) Working Group with appropriate decision making and technical-level meetings as a part of the trade policy forum.” Similarly, India could look at treaties like the Hague Treaty on Industrial Designs to strengthen its IPR regime.

In the context of protection of any misuse or wrongful use of ‘Darjeeling Tea’ or any deceptively similar trade name or mark which is applied to a product not belonging to that region which holds a right over it under the Gl Act, 1999, it is necessary that a concerted effort be made by all the nations as also the concerned International Organizations, especially the TRIPS, to ensure that there is no violation committed in their respective territory of the rights of others.

Question 7.
What is a geographical indication? How is a geographical indication different from a trademark? List out the examples of possible Indian Geographical Indications?
Answer:
The geographical indications are the indications that identify a good as originating in the territory or a region or a locality where a given quality, reputation, or other characteristics of the good is attributable to its geographical origin.

According to section 2 (e) “Geographical Indication” in relation to goods, means an indication which identifies such goods as agricultural goods, natural goods, or manufactured goods as originating or manufactured in the territory of a country or a region or locality in that territory, where a given quality reputation or another characteristic of such goods is essentially attributable to its geographical origin and in the case where such goods are manufactured goods, one of the activities of either the production or of processing or preparation of the goods concerned takes place in such territory, region or locality, as the case may be. The difference between geographical indication and trademark are as follows:

Geographical Indication Trade Mark
It denotes that the product originates from a particular place, which has a reputation for certain characteristics attributable to that place of production or manufacture. It is a mark used by an enterprise in relation to goods or services to distinguish them from those of others.
It represents a common heritage of the community of producers in the geographical region or locality, whose products share the same qualities and characteristics, so that geographical indication may be used by all the producers engaged in their production in that region or locality It is proprietary in nature, with exclusive right on the owner to use the mark.

Examples of possible Indian geographical indications are:

  1. “Darjeeling” for tea of Indian origin;
  2. “Kanjeevqram Silk” denotes that product from Kanjeevaram in Southern India;
  3. “Benaras Silk” indicating products of Indian origin.

Other examples are:

  1. Kolhapur Chappals,
  2. Agra Petha,
  3. Kota Masuria,
  4. Bikaneri Bhujia etc.

Question
When is a registered geographical indication said to be infringed? Can a registered geographical indication be assigned, transmitted, etc?
Answer:
According to Section 22, a registered geographical indication is said to be infringed by a person who, not being an authorized user thereof geographical indication by any means in the designations of presentation of goods that indicates or suggest that such goods originate in a geographical area other than the true place of origin of such goods in a manner good; or which misleads the persons as to the geographical origin of such goods; or uses any geographical indication in such manner which constitutes an act of unfair competition including passing off in respect of registered geographical ‘indication.

“Act of unfair competition” means any act of competition contrary to honest practices in industrial or commercial matters.

No, a registered geographical indication cannot be assigned, transmitted, etc. A geographical indication is a public property belonging to the producers of the concerned goods. It shall not be the subject matter of assignment, transmission, licensing, pledge, mortgage, or such other agreement. However, when an authorized user dies, his right devolves on his successor in title.

Question 8.
Who can apply for the registration of a geographical indication? What is the benefit of registration of geographical indications? Who is a registered proprietor of a geographical indication?
Answer:
As per Section 11 of the act, an application for registration of a geographical indication may be made by,

  1. any association of persons or producers or any organization or authority established by or under any law for the time being in force;
  2. who must be representing the interest of the producers of the concerned goods; and
  3. desirous of registering a geographical indication in relation to such goods.

The benefits of registration of geographical indication are:

  • Registration gives to the registered proprietor and its authorized users, the legal right to the exclusive use of the geographical indication;
  • It also gives the right to obtain relief in case of its infringement. Exclusion of unauthorized persons from misusing geographical indications would ensure that genuine products of -the rightful producers are marketed.

Any association of persons, producers, organization, or authority established by or under the law can be a registered proprietor of the company. Their name should be entered in the Register of the geographical indication as registered proprietor for the geographical indication applied for.

Question
What is the prohibition of registration of certain geographical indications?
Answer:
Section 9 of the Act prohibits the registration of certain geographical indications. They are as follows:

  1. The use of which would be likely to deceive or cause confusion;
  2. The use of which would be contrary to any law for the time being in force;
  3. Which comprises or contains scandalous or obscene matter;
  4. Which comprises or contains any matter likely to hurt the religious susceptibilities of any class or section of the citizens of India;
  5. Which would otherwise be disentitled to protection in a Court;
  6. Which are determined to be generic names or indications of goods and are, therefore, not or ceased to be protected in their country of origin, or which have fallen into disuse in that country;
  7. Which although literally true as to the territory, region, or locality in which the goods originate but falsely represent to (he persons that the goods originate in another territory, region, or locality, as the case may be shall not be registered as a geographical indication.

It may be noted that “Generic names or indications”, in relation to goods means the name of a good which, although relates to the place or the region where the goods were originally produced or manufactured has lost its original meaning and has become the common name of. such goods and serves as a designation for or indication of the kind, nature, type, or other property or characteristic of the goods.

CS Professional Intellectual Property Rights Laws and Practices Notes

Patent Infringement – Intellectual Property Rights Laws and Practices Important Questions

Patent Infringement – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
With reference to the relevant legal enactments, write short notes on the following:
(vi) Potential infringement of a patent.
Answer:
Potential infringement of a patent:
1. It refers to do any act which comes under the prohibited act with respect to a patented invention infringement of a patent occurs without permission of the patent holder.
2. It normally includes using or selling the patented invention.
3. Patentee relief for infringement are as under

  • Interim injunction
  • Damages on account of profits
  • Permanent injunction

Question 2.
(a) Explain the powers of the Controller in respect of an application for a patent that has a substantial risk of infringement.
Answer:
Section 19 of the Patents Act, 1970 covers the powers of the controller in respect of an application for a patent that has substantial risk of infringement.

  • If it appears to the controller in respect of an application for a patent that has a substantial risk of infringement, he may direct that a reference to that other patent, be inserted in the applicant’s complete specification by way of notice to the public.
  • Such reference will not be inserted if the applicant shows to the satisfaction of the controller that there are reasonable grounds for contesting the validity of the said claim of the other patent.

Question 3.
(a) Statement: Customs has lost power to interdict Patent violating goods at the Border. It can stop imports of trademark infringement but not patents By Notification Nos. 56-Customs (NT) and 57- Customs (NT) dated 22 June 2018 the Customs has lost its power to interdict patent infringing goods at the time of customs clearance. In the previous dispensation, a patent registered with the customs was automatically enforced at the border by an alarm triggered by the EDI computer which raised a flag from the inward manifest when goods with registered patents entered a port. The infringing goods import was prohibited under Sec. 11 of Customs Act, 1962. The offense could result in confiscation of the goods and their destruction. What is the impact of the above on technology import and domestic manufacturing? Discuss.
Answer:
Many multinationals secured Patent protection at the border without having taken the pains to go to the Court of Law to get an adjudication as regards infringement of the Patent. This provision in the border rules was deliberately inserted in the 2007 law by certain vested interests in the customs who wanted a source of income from the legal practice of Patent law after their retirement. They went beyond the TRIPs Agreement at WTO which allowed waiver of Patent enforcement at the border to Developing Countries.

(The fact that Indian Border Rules on Patent enforcement go beyond WTO TRIPS was first pointed out by the Academy Business Studies in 2007. It has taken 11 years for the Government to amend the rules and bring with it the special treatment offered to develop countries by WTO).

Many Indian manufacturers, who were earlier harassed by the Customs Authority on the ground that the goods imported infringe somebody’s registered Patent, shall get relief from the present notification. The imposters in India who registered false Patents with an intent to blackmail the importers will also lose ground due to the present notification. The Ramkumar case of 2007 is of relevance here. In that case, an “inventor” from Madurai registered a false Patent for dual sim mobile phones of suitcase size. He demanded and secured, some 60 crore rupees from the reputed company (an importer in this case) like Samsung, as a license fee to import dual sim phones. Finally, the law caught hold of him, and the IP Appellate Board overturned his Patent and thus the Customs Authority allowed free import of the dual sim phones without Ram Kumar’s NOC (No Objection Certificate).

The amendment brought into the Border Rules (the present notification in particular) is not intended to say that India shall not provide protection to the Patent Rights of Inventors. A regular Court of Law, as well as the IP Appellate Board (IPAB), is required to be moved by such Patent holder in order to secure an injunction to stop any infringement of his rights at the point of sale/import of an infringing article. In the two notifications reference to Patent Act, 1970 have been omitted and in the registration as well as enforcement system. Other I PRs like copyright, designs, and trademark will however continue to get protection at the border. Since the notification is made effective prospectively, all past cases shall, however, continue to be adjudicated at the customs border as per the old law.

Question 4.
Ericsson is a Swedish multinational company and is the registered owner of eight patents pertaining to AMR technology, 3G technology, and Edge technology in India. It is amongst the largest patent holders in the mobile phone industry along with Qualcomm, Nokia, and Samsung. The patents owned by Ericsson are considered to be standard essential patents. Standard essential patents are those patents that form q part of a technical standard that must exist in a product as a part of the common design of such products. In the past two years, Ericsson has been suing various mobile handset companies on the ground of patent infringement in India, such as Xiaomi Technology (Xiaomi), Micromax Informatics Ltd. (Micromax), and Intex Technologies (India) Ltd. (Intex), which are major handset and smartphone provider companies in India.

Contentions of Ericsson:
Ericsson moved to the Delhi High Court against companies named above contending that licenses on the standard-essential patents were offered to be granted to these companies on fair, reasonable, and non-discriminatory (FRAND) terms. However, these companies had refused to undertake such^cences and were using these patents without a license and accordingly were infringing Ericsson’s patents.

The decision of the High Court:
The High Court held that prima facia Micromax and Xiaomi were dealing with a patent infringing product and therefore, granted ex-parte injunction orders against them. Furthermore, the court also directed the Customs Authorities to take note of any consignment of the products undertaken by these companies. In the case of Xiaomi, Flipkart was also impleaded in the order and was directed to get rid of all the products of Xiaomi that may be patent infringing. Although Xiaomi managed to acquire an order allowing the company to import and sell the devices that use the chipsets imported from Qualcomm Inc., a licensee of Ericsson, it was asked to deposit an amount of ₹ 100 for the sale of every device. Furthermore, the court also directed Micromax to pay certain royalty rates per set to Ericsson pending the final outcome of the patent infringement suit, if Micromax wanted to continue selling the devices. The aforesaid ex-parte injunction orders by the High Court were with respect to selling, advertising, importing, and/or manufacturing devices that infringed the patents owned by Ericsson.

CCI Investigation Orders:
Some of the aggrieved parties like Micromax decided to file a complaint under section19(1)(a) of the Competition Act, 2002 before the Competition Commission of India (CCI) against Ericsson. These parties claimed that Ericsson did not negotiate the terms of the license for the standard-essential patents as per FRAND terms.

The main contention raised by the parties was that the royalty rates prescribed by Ericsson were excessive and discriminatory and that Ericsson, being a dominant player in the relevant market with respect to the essential patents, had taken advantage of its position and charged exorbitant rates for royalty from the companies for use of its patents. The CCI considered this contention and after examining the evidence presented, agreed with the companies and passed an investigation order. However, this order suffered a blow as the Delhi High Court passed an order restraining the CCI from passing final orders with respect to the contention of the companies. The Delhi High Court held that the CCI’s order resulted in raising a question of conflict of jurisdiction with the orders of the Delhi High Court. The High Court held that the order of CCI was adjudicatory and determinative due to the nature of the order being detailed and as a result of which the remedy available to Ericsson had been discarded.

After perusing the narrative above, answer the following questions:

  1. Under what provisions of the Patents Act, 1970, can the court grant injunction orders? Is the injunction order justified in this case?
  2. What are the likely implications of such ex-parte orders for the public?
  3. How does the Competition Act, 2002 deal with matters relating to IPRs?

Answer:
(1) Section 108 of the Patents Act, 1970 provides the power of the Court to issue injunction orders for infringement, subject to such terms, if any, as the Court thinks fit. In the case of patent infringement, interlocutory order in the form of temporary injunction can be granted if facts indicate:

  • a prima facia of infringement;
  • balance of convenience is in favor of the plaintiff;
  • insufferable damage for the plaintiff, if the injunction is not granted. The patents owned by Ericsson are considered to be Standard Essential Patents. Standard Essential Patents are those patents that form a part of a technical standard that must exist in a product as a part of the common design of such products. The Indian Patents Act, 1970 seeks to protect the rights of patent holders, and the Court has displayed its willingness to protect such rights. In fact, the Courts have often granted ex-parte injunction orders, without hearing any arguments on merits from the alleged infringers.

But in this case, the Court failed to reckon that the patents were Standard Essential Patents. As mentioned above, Standard Essential Patents form a part of a technical standard that must exist in a product as a part of the common design of such products. The alleged infringers were under the obligation to ensure that the Standard Essential Patents as a technical standard existed in their products as a part of common design. In the circumstances, it would have been in order if the Defendants (alleged infringers) had been given a hearing before the order had been passed.

(2) The High Court granted ex-parte injunction orders, without hearing any arguments on merits from the alleged infringers. Besides the fact that the Court failed to observe that the patents in these cases were. Standard Essential Patents, it cannot be, he again said that it would have major implications with respect to the development of technology and protection of consumers. Consumers in these circumstances are likely not given enough choice due to such ex-parte injunction orders. In the case of Xiaomi, Flipkart was impleaded in the order and the Court directed Flipkart to get rid of all the products of Xiaomi that may be patent infringing. Although Xiaomi managed to acquire an order allowing the company to import and sell the devices that use the chipsets imported from Qualcomm Inc., a licensee of Ericsson, it was asked to deposit an amount of INR 100 for the sale of every device.

Thus the consumers were deprived of the products of Xiaomi before even the charges of infringement were proved. Furthermore, the Court also directed Micromax to pay certain royalty rates to Ericsson pending the final outcome of the patent infringement suit, if Micromax wanted to continue selling the devices. The consumers impliedly would have to pay more for the products; as Micromax would pass on the royalty payments in the price payable by the former.

(3) Section 3(5) of the Competition Act, 2002 deals with its applicability to matters relating to IPRs. Section 3 of the Competition Act, 2002 dealing with anti-competitive practices. It states that:

(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition, or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

(2) Any agreement entered into in contravention of the provisions contained in sub-section (1) shall be void.
Section 3(5) declares that nothing contained in this Section shall restrict:
(i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as many are necessary for protecting any of his rights which have been or may be conferred upon him under:

  • The Copyright Act, 1957
  • The Patents Act, 1970
  • The Trade Marks Act, 1999
  • The Geographical Indications of Goods (Registration and Protection) Act, 1999
  • The Designs Act, 2000
  • The Semi-Conductor Integrated Circuits Layout Design Act, 2000

Thus, the patent holder has every right to restrain the infringement of his rights. Section 3(5) of the Competition Act, 2002 cannot come in the way of the right of the patent holder to restrain infringement of his rights, unless he has imposed any unreasonable conditions while granting the license. In cases of unreasonable conditions in the license, Section 3 of the Competition Act can be invoked. This is the legal situation on a bare reading of the Competition Act, 2002 in conjunction with the Patent Act, 1970.

The decision of the Delhi High Court pertaining to the CCI’s .investigation orders shows that there is a possibility in patent cases that CCI’s orders may result in the overlapping with the jurisdiction of the High Courts and result in intervening with the jurisdiction of the High Court. The role of CCI in patent cases needs to be clearer. The High Court has flagged the issue for adjudication.

Question 5.
Read the following case study and answer the questions that follow:
A question for adjudication, whether Section 107 A of the Patents Act, 1970 permits export from India of a patented invention, even if solely for uses reasonably related to the development and submission of information required under any law for the time being in force, in India, or in a country other than India, that regulates the manufacture, construction, use, sale or import of any product, camp up before the High Court of Delhi.

The petitioner, Bayer Corporation (Bayer) filed a writ petition in the High Court of Delhi contending that Natco was granted a Compulsory Licence by the Controller of Patents for the drug ‘Sorafenib Tosylate’ under section 84 of the Patents Act, subject to certain terms and conditions contained therein, that one of the said terms was that the Compulsory Licence was solely for the purposes of making, using, offering to sell and selling the drug covered by the patent for the purpose of treating HCC and RCC in humans within the territory of India, that Natco was, however, manufacturing the product covered by the Compulsory Licence for export outside India and that the export by Natco was contrary to the terms of Compulsory Licence and amounted to infringement of the patent within the meaning of Section 48 of the Patents Act.

Natco filed a counter affidavit in the writ petition inter alia pleading (a) that Natco had not exported any product (subject matter of Compulsory Licence); (b) that under the scheme of the Drugs and Cosmetics Act, 1940 (Drugs Act) permission was routinely granted for export to various countries upon compliance of certain conditions and that there were similar provisions in the western countries including Europe; (c) that the Patents Act also provided that export of a patented product for generation or submission of regulatory permission was not an act of infringement; (d) that the export by Natco was also for regulatory purposes (e) that such export was not at all barred by the Compulsory Licence; (f) that the activity of conducting studies for regulatory approval was squarely covered under Section 107A of the Patents Act, and

(g) that Natco had never exported the finished product to any party outside India for commercial purposes. Bayer, in its rejoinder to the counter affidavit aforesaid pleaded (i) that Section 107A of the Patents Act had no application as the acts contemplated thereunder, of making, constructing, using selling or importing a patented invention, were to be performed within the territory of India and that the information from such activity could be submitted with the regulatory authorities either in India or with the countries other than India; (ii) that Section 107A of the Act did not contemplate export of product perse but was limited to information generated within the territory of India; and (iii) that export of a product covered by Compulsory License under the garb of Section 107A of the Act was abuse of the process of law.

It was the contention of the senior counsel for Bayer (a) that the rights, if any of Natco, under Section 107A of the Act stood surrendered on Natco obtaining the Compulsory Licence and thereafter Natco was governed only by the terms of the Compulsory Licence; (b) that such giving up of statutory rights under Section 107A of the Act flowed from Section 84(4) of the Patents Act, (c) that the word ‘selling’ in Section 107A of the Patents Act meant selling in India only and did not include export; (d) that Section 107A of the Act, owing to its history called the ‘Bolar Provision’ was only to enable the activities mentioned in Section 107A of the Act within India and not for. exports; (e) that Section 107A of the Act was not enacted for seeking approval to manufacture a new drug in other countries; (f) that to read the word ‘export’ in Section 107A would amount to making laws for other countries, and (g) that Section 107A of the Act used the word ‘import’ and from the absence of the word ‘export’ therein, the only logical conclusion was that exports of the patented invention were outside the ambit of Section 107A of the Act (reproduced below).

Section 107A of the Patents:
“For the purposes of this Act (a) any act of making, constructing, using, selling or importing a patented invention solely for uses reasonably related to the development and submission of information required under any law for the time being in force, in India, or in a country other than India, that regulates the manufacture, construction, use, sale or import of any product (b) importation of patented products by any person from a person who is duly authorized under the law to produce and sell or distribute the product, shall not be considered as an infringement of patents rights.” It will be in order to reproduce Section 48 of the Copyright Act to provide the context.

Section 48: “Rights of Patentees – Subject to the other provisions contained in this Act and the conditions specified in Section 47, a patent granted under this Act shall confer upon the patentee – (a) where the subject matter of the patent is a product, the exclusive right to prevent third parties, who do not have his consent, from the act of making, using offering for sale, selling or importing for those purposes that product in India; (b) where the subject matter of the patent is a process, the exclusive right to prevent third parties, who do not have his consent, from the act of using that process, and from the act of using, offering for sale, selling or importing for those purposes the product obtained directly by that process in India.”

The said Section 48 prescribes the rights of a patentee on the conferment of the patent. Those rights vest exclusively in the patentee. Axiomatically, the exercise of any of those rights by a non-patentee would be an infringement of the patent. Counsel for Bayer contended that, the acts of a non-patentee (IMatco) of making, using offering for sale, selling patented products would be an infringement of patent and that the patentee was entitled to approach the Courts to prevent the non-patentee from doing the said acts.

The senior counsel for Natco argued (i) that the exports intended by Natco were only for research and development purposes and for obtaining the drugs regulatory approvals in the countries to which exports were intended (ii) that Natco was not intending export of the product covered by the Compulsory Licence for commercial purposes (iii) that before a new drug was granted marketing approval, the drug regulatory authorities had to test its safety, efficacy and therapeutic value by requiring clinical trials to be undertaken; (iv) that Indian pharmaceutical industry was the largest exporter of generic drugs; and the biggest supplier of medicines to the developing world; (v) that research and development activity with respect even to patented drugs, for submission of data to the Drug Regulatory Authority, was not infringement; (vi) that Section 48 of the Patents Act was subject to other provisions of the Act, (vii) that the rights of Natco under Section 107A were independent of the Compulsory Licence; and (viii) that grant of compulsory Licence could not be in negation of the rights under Section 107A.

Further argued Natco that it was the purpose which distinguished, whether the impugned acts constituted infringement of a patent or not. If the said purpose was within the confines of Section 107A, the acts so done would not constitute infringement and the patentee would not have the right to prevent a non-patentee from doing them. However, if the purpose of doing the acts of making, using, selling, or importing a patented invention was not solely for the purposes prescribed in Section 107A, the said acts would constitute an infringement of patent and the patentee would have the right to prevent a non-patentee from doing them. Hence the need for the word ‘selling’ in Section 107 A

Thus, sale by a non-patentee of a pharmaceutical product solely for the purposes prescribed in Section 107A would also not be an infringement and cannot be prevented. Bayer could not controvert that such selling of patented invention, even if for profit, as long as solely for the purposes prescribed in Section 107A, is not infringement and cannot be prevented.

The point of difference between Bayer and Natco is qua selling outside India. While Bayer contended that the word ‘selling’ in Section 107A was confined to within the territory of India and that selling of patented invention outside India even if for purposes specified in Section 107A would constitute an infringement which could be prevented by the patentee, the contention of the senior counsels for Natco was that use of the word ‘selling’ under Section 107A was without any such restriction of being within India only and would include selling outside India also, so long as solely for the purposes proscribed in Section 107A.

An issue that was raised during the proceedings in the Court related to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). India as a party to the TRIPS agreement has agreed to give effect to the provisions thereof without being obliged to implement in its law more extensive protection than is required by it, provided that such protection does not contravene the provisions of the TRIPS Agreement. Else, India is free to determine the appropriate method of implementing the provisions of the TRIPS Agreement within its own legal system and practice.

The objective of the TRIPS Agreement, as per Article 7 thereof, is protection and enforcement of intellectual property rights, to contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare and to a balance of rights and obligations. Per Clause 1 of Article 8 of the TRIPS Agreement, member countries, in formulating and amending their laws and regulations, have the discretion to adopt measures necessary to protect public health and nutrition and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of the TRIPS Agreement.

Article 30 of the TRIPS Agreement entitles the member countries to provide limited exceptions to the exclusive rights conferred by a patent provided that such exceptions do not unreasonably conflict with the normal exploitation of the patent and so not unreasonably prejudice the legitimate interest of the patent owner, taking into account the legitimate interest of third parties. Article 31 of the TRIPS Agreement, while providing that the laws of member countries may allow the use of patented product/process for a certain purpose, vide Clause (f) provides that such use should be predominantly for the supply of the domestic market of the member country authorizing such use.

It is the contention of counsels for Bayer, that the use permitted by Section 107A thus has to be for selling to the domestic market only and not for selling by way of export. The submissions of both the parties traverse the contours of the Patents Act and TRIPS Agreement. Having regard to the submissions, answer the following questions.

Questions:

  1. What is the spirit/basis for Section 107A of the Patents Act?
  2. Would the word ‘selling’ in Section 107A of the Patents Act include export?
  3. Are the provisions Section 107A and Section 48 independent of each other?
  4. Discuss the relevance of Article 31(f) of the TRIPS Agreement in the instant case.

Answer:
(1) Section 107A was incorporated/inserted into the Patents Act, 1970 vide the Amendment Act of 2002 (Act 38 of 2002), and the same came into effect from 20th May 2003. The broad purpose and spirit behind bringing in such a provision on the statute book were to lay down certain acts which shall not be considered as amounting to an ‘infringement of a patent. This was done in pursuance of the larger public interest.

The importance of Section 107A is to be understood in light of the provisions of Section 48 of the Act wherein the rights of the patentee (patent holder) have been laid down. A Patentee is conferred with certain exclusive rights as regards the invention (product or process) which is the subject matter of his patent. Normally, the acts of a nonpatentee, of making, using, offering for sale, selling patented products would be an infringement of the patent, and the patentee is entitled to approach the Courts to prevent such non-patentee from doing such acts.

However, by virtue of Section 107A, the acts of a non-patentee of making, using, selling a patented product for the purposes prescribed therein have been made as not amounting to infringement of the patent. In all such cases, the patentee cannot prevent the non-patentee from doing them. But for Section 107A, the acts of making, constructing, using, selling or importing of a patented invention, even if for the purposes prescribed in Section 107A would have constituted an infringement of the patent.

It is thus the purpose for which the said acts are done’ which distinguishes, whether the acts constitute an infringement of a patent or not. If the said purpose is within the confines of Section 107A, the acts so done would not constitute infringement and the patentee cannot prevent a non-patentee from doing them. However, if the purpose of doing the acts of making, using, selling or importing a patented invention is not solely for the purposes prescribed in Section 107A, the said acts would constitute an infringement of patent and patentee can prevent non-patentee from doing them.

Therefore, the consideration and the object behind inclusion of such a provision was to allow the acts of making, using, selling a patented invention, even during the life of the .patent but solely for uses reasonably related to the development and submission of information required under the law for obtaining approval.

(2) Section 107A lays down that any act of making, constructing, using, selling or importing a patented invention solely for uses reasonably related to development and submission of information required under any law for the time being in force, in India, or in a country other than India, that regulates the manufacture, construction, use, sale or import of any product shall not be considered as an infringement of the patent right of somebody else. The pertinent question that arises in the present set of facts however is, ‘whether a non-patentee thereunder can export a patented invention for such purposes. The answer to this question has to be sought from the language of Section 107A itself.

In the recent case, this question was answered by the Hon’ble High Court of Delhi wherein it has held that a ‘Sale by a non-patentee of a pharmaceutical product solely for the purposes prescribed in Section 107A would also not be an infringement and cannot be prevented’. However, the further question to be answered is whether the word ‘selling’ in Section 107A is confined to within the territory of India and thus selling of patented invention outside India, even if for purposes specified in Section 107A, would constitute an infringement which can be prevented by the patentee.

To answer the question and to interpret the word ‘selling’, the Court proceeded to dissect the language of Section 107A and came to a finding that the meaning and ambit of the term ‘selling’ cannot be confined to ‘selling within India only. If further held that the ‘presence of the word import’ and absence of the word export’ in Section 107A does not lead to any inference of the word ‘selling’ therein being exclusive of in the course of export. While the need for exporting was not felt due to the presence of the word ‘selling’, the need for the word ‘importing’ in Section 48 was necessary to preserve the exclusive right of the patentee and in Section 107A to allow import for purposes prescribed therein’.

(3) Section 48 of the Patents Act, 1970 which is titled as ‘Rights of Patentee’ starts with the wording ‘Subject to the other provisions contained in this Act and the conditions specified in Section 47, a patent granted under this Act shall confer upon the patentee….’. Therefore, it is sufficiently clear while conferring certain rights on the Patentee to prevent others from making use of the Product or Process (as the case may be) which is the subject matter of his patent, it admits of certain exceptions carved out by Section 107A. Section 107A provides that the acts of a non-patentee of making, using, selling a patented product for the purposes prescribed therein shall not be considered as an infringement. Therefore, the patentee cannot prevent the non-patentee from doing them.

In the present set of facts, the exports intended by Natco are only for research and development purposes and for obtaining the drug regulatory approvals in the countries to which exports are intended. Natco did not intend to export the product covered by the Compulsory Licence for commercial purposes. Therefore, as mentioned above, Section 48 of the Patents Act is subject to other provisions of the Act and the rights of Natco under Section 107A are independent of the Compulsory Licence, and grant of Compulsory Licence will not be in the negation of the rights under Section 107A.

It follows that the grant of a patent under the Act does not confer on the patentee’s right to prevent others from making and selling the patented product if solely for purposes prescribed in Section 107A. These are two independent provisions, admitting of no overlap or need to read one as a proviso (and consequently narrowly) to another. The rights conferred on non-patentees under Section 107A are to be interpreted following the same rules as the rights of a patentee and are not to be read narrowly or strictly so as to reduce the ambit of Section 107A, as is the rule of interpretation of statutes in relation to provisos or exceptions. Section 107A is not carving out an exception to the exclusive right conferred by the grant of a patent.

(4) Section 107A of the Patents Act, 1970 is not an exception that is carved out to the exclusive rights conferred by the grant of a patent. The exclusive right conferred by the grant of a patent with respect to selling, offering for sale, and thereby profiteering and earning from the patent is confined only during the term of the patent. Section 107A permits the sale of a patented product during the term of the patent but only for the purpose of obtaining regulatory approvals for manufacturing and marketing the patented product after the expiry of the term of the patent.

The purchaser/s of a patented product for such a purpose would be few and negligible in comparison of the consumers of the patented product. There is nothing in the provisions of the TRIPS Agreement to suggest that reading the word ‘selling’ in Section 107A as including ‘by way of export’, would be in violation of the TRIPS Agreement. TRIPS Agreement specifically vests discretion in the member countries to adopt measures in their laws which are necessary to promote public interest in sectors of vital importance to their socio-economic development. Even if it were to be considered that clause (f) of Article 31 thereof allows domestic operation only of Bolar provision, the Indian Parliament while enacting the Patents Act, 1970 was entitled to, having regard to the extent of the Indian Generic Industry, permit export for purposes of Section 107A.

The patents Act is concerned with the protection of the rights of the patentees in India only and not outside India. Neither the legislature nor the Courts in India can impose any conditions on the use of the goods exported once they reach the destination country or ensure that such goods continue to comply with the laws in India. The use of the goods in a foreign country would be subject to the laws of that country and cannot be regulated by the laws of India or orders of the Courts in India. Even if it were to be believed that the patented invention once exported from India for the purposes prescribed in Section 107A may be used for other purposes, it is for the patentee to enforce its rights if any in that country.

The laws of India are only concerned with the sale by way of export from this country being for the purposes prescribed. As long as the sale by way of export is declared to be for purposes of Section 107A and there is nothing to suggest that it is otherwise, no fetters can be imposed.

Question 6.
Write a brief not on Doctrine of Equivalents and Doctrine of Colorable Variation.
Answer:
The doctrine of Equivalents and Doctrine of Colorable Variation: Patent infringement generally falls into two categories: literal infringement and infringement under the doctrine of equivalents. The term “literal infringement” means that each and every element recited in a claim has an identical correspondence in the allegedly infringing device or process.

However, even if there is no literal infringement, a claim may be infringed under the doctrine of equivalents if some other element of the accused device or process performs substantially the same function, in substantially the same way, to achieve substantially the same result. The doctrine of equivalents is a legal rule in most of the world’s patent systems that allows a Court to hold a party liable for patent infringement even though the infringing device or process does not fall within the literal scope of a patent claim but nevertheless is equivalent to the claimed invention.

An infringement analysis determines whether a claim in a patent literally “reads on” an accused infringer’s device or process, or covers the allegedly infringing device under the doctrine of equivalents. The steps in the analysis are:

  • Construe the scope of the “literal” language of the claims.
  • Compare the claims, as properly construed, with the accused device or process, to determine whether there is literal infringement.
  • If there is no literal infringement, construe the scope of the claims under the doctrine of equivalents.

The doctrine of equivalents is an equitable doctrine that effectively expands the scope beyond their literal language to the true scope of the inventor’s contribution to the art. However, there are limits on the scope of equivalents to which the patent owner is entitled.

The doctrine of Colorable Variation:
A colorable variation or immaterial variation amounting to infringement is where an infringer makes slight modifications in the process or product but in fact, takes in substance the essential features of the patentee’s invention.

In Lektophone Corporation v. The Rola Company, 282 U.S. 168 (1930), a patent holder’s patents were of sound-reproducing instruments for phonographs. According to the patent application, the size and dimensions of the invention were the essences of the patent. The patent holder claimed that a radio loudspeaker manufactured by the defendant (manufacturer) infringed the patents. The manufacturer’s devise also had a central paper cone, but the cone was smaller than that of the patented devise and that constituted colorable alteration. The court held that because of colorable alterations of the manufacturer’s devise, would not accomplish the object specified in the patent claims and hence did not infringe upon the patent holder’s claims. There are five ways to justify a case of patent infringement:

  • Doctrine of Equivalents
  • Doctrine of Complete Coverage
  • Doctrine of Compromise
  • Doctrine of Estoppel
  • Doctrine of Superfluity

Sometimes the end-user is not even aware that he or she is using a patented item unlawfully. Other times, there are too many people using the item to sue all of them. Rather than suing end users, it might be best to sue those who are knowingly trying to infringe on a patent.

Question 7.
Write a Brief Note on the Power of Controller in Case of Potential Infringement. .
Answer:
Power of Controller in case of Potential Infringement:
Section 19 of the Patent Act, 1970 provides that –

1. If, in consequence of the investigations required under this Act, it appears to the Controller that an invention in respect of which an application for a patent has been made cannot be performed without substantial risk of infringement of a claim of any other patent, he may direct that a reference to that other patent shall be inserted in the applicant’s complete specification by way of notice to the public, unless within such time as may be prescribed—

  • The applicant shows to the satisfaction of the Controller that there are reasonable grounds for contesting the validity of the said claim of the other patent; or
  • The complete specification is amended to the satisfaction of the Controller.

2. Where, after a reference to another patent has been inserted in a complete specification in pursuance of a direction under sub-section (1) –

  • That other patent is revoked or otherwise ceases to be in force; or
  • The specification of that other patent is amended by the deletion of the relevant claim; or
  • It is found, in proceedings before the court or the Controller, that the relevant claim of that other patent is invalid or is not infringed by any working of the applicant’s invention, the Controller may, on the application of the applicant, delete the reference to that other patent.

Review of Controllers’ Decision (Procedure)
The statute provides for review of the Controller’s decision under section 77 of the Patents Act 1970. The applicant needs to file Form 24 within the time limits prescribed in Rule 130. The Controller shall act in accordance with the prescribed norms under Rule 130 and decide that matter on the merit of each case. The Controller, in any proceeding before him under the Patents Act, 1970, shall have the powers of a civil court while trying a civil suit under Code of Civil Procedure, 1908 (5 of 1908). The review under section 77 is dealt with in the like manner.

Who may file the review Petition:
Any person considering himself aggrieved

  • by a decree or order from which an appeal is allowed, but from which no appeal has been preferred,
  • by a decree or order from which no appeal is allowed, Grounds for review:

Grounds for review:

  • Discovery of new and important matter or evidence which, after the exercise of due diligence was not within petitioner’s knowledge or could not be produced by him at the time when the decree was passed or order made, or
  • on account of some mistake or error apparent on the face of the record’ or, for any other sufficient reason

A party who is not appealing from a decree or order may apply for a review of judgment notwithstanding the pendency of an appeal by some other party except where the ground of such appeal is common to the applicant and the appellant, or when, being respondent, he can present to the Appellate Court, the case on which he applies for the review.

Hon’ble Supreme Court of India on reviews:
Hon’ble Supreme Court in Satyanarayan Laxminarayan Hegde and Ors. vs. Mallikarjun Bhavanappa Tirumale (AIR 1960 SC 137) held that “An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record. Where an alleged error is far from self-evident and if it can be established, it has to be established, by lengthy and complicated arguments, such an error cannot be cured by a Writ of Certiorari according to the rule governing the power of the superior Court to issue such a writ.” The very fact that the Learned Counsel for the appellant had to labor for several hours to make her submissions would show that if there were errors in the decisions, it had to be decided only by a process of reasoning that is not apparent on the face of the records.

Question 8.
Write a Brief Note on powers of Intellectual Property Appellate Board.
Answer:
Pursuant to the amendments introduced to the Patents Act, 1970 in 2002, a specialized forum called Intellectual Property Appellate Board (“IPAB”) has been constituted by the Central Government on September 15, 2003, to hear and adjudicate appeals against the decisions of the Registrar under the Trade Marks Act, 1999 and the Geographical Indications of Goods (Registration and Protection) Act, 1999.

In India, only High Courts have the power to deal with both infringement and invalidity of patents simultaneously. Now the IPAB has since April 2, 2007, been extended to Patent law and is now authorized to hear and adjudicate upon appeals from most of the decisions, orders, or directions made by the Controller of Patents. Also, vide a notification; all pending appeals from the Indian High Courts under the Patents Act were transferred to the IPAB from April 2, 2007.

The IPAB has its headquarters in Chennai and has sittings at Chennai, Mumbai, Delhi, Kolkata, and Ahmedabad.

Jurisdiction:
Every appeal from the decision of the Controller to the IPAB must be made within three months from the date of the decision, order, or direction, as the case may be, or within such further time as the IPAB may permit, along with the prescribed fees.

Exceptions:
The IPAB (Procedure) Rules, 2003 exempt orders passed by the Central Government of India with respect to inventions pertaining to defense purposes, including directions of secrecy in respect of such inventions, revocation if the patent is contrary or prejudicial to the public interest, or pertains to atomic energy, from the purview of appeal to the IPAB.

Transfer of pending proceedings to IPAB:
The IPAB is the sole authority to exercise the powers and adjudicate proceedings arising from an appeal against an order or decision of the Controller. All the cases pertaining to revocation of the patent, other than a counter-claim in a suit for infringement, and rectification of register pending before the Indian High Courts shall be transferred to the IPAB. In case of a counter-claim in a suit for infringement, the Indian High Courts continue to be the competent authority to adjudicate on the matter.

The IPAB also has exclusive jurisdiction on matters related to revocation of patent and rectification of register.
The IPAB in its sole discretion may either proceed with the appeals afresh or from the stage where the proceedings were transferred to it.

Question 9.
Write short notes on the following:

  1. Direct Infringement
  2. Declaration as to non-infringement
  3. Defenses for infringement

Answer:
(1) Direct Infringement: Direct patent infringement is the most obvious and the most common form of patent infringement. Basically, direct patent infringement occurs when a product that is substantially close to a patented product or invention *is marketed, sold, or used commercially without permission from the owner of the patented product or invention.

(2) Declaration as to non-infringement: Under Section 105 of the Act, any person after the grant of publication of patent may institute a suit for a declaration as to non-infringement. For this the plaintiff must show that:

  • he applied in writing to the patentee or his exclusive licensee for a written acknowledgment to the effect that the process used or the article produced by him does not infringe the patent and
  • patentee or the licensee refused or neglected to give such an acknowledgment. It is not necessary that the plaintiff must anticipate an infringement suit.

(3) Defenses for infringement:
1. In any suit for infringement of a patent, every ground on which it may be revoked under Section 64 shall be available as a ground for defense.

2. In any suit for infringement of a patent by the making, using or importation of any machine, apparatus, or other article or by the user of any process or by the importation, use, or distribution of any medicine or drug, it shall be a ground for a defense that such making, using, importation or distribution is in accordance with any one or more of the conditions specified in Section 47 [Section 107] In Cadila Pharmaceuticals Ltd. v. Instacare Laboratories Pvt. Ltd., 2001(21) PTC 472 (Guj), the Gujarat High Court observed that Section 107 expressly empowered a defendant to defend any suit for infringement of a patent. Every ground on which a patent could be revoked under section 64 was available as a ground of defense. Though the defendant had chosen not to give notice of opposition under section 25 of the Act or to apply for revocation under section 64 of the Act, he still had the right to defend his action on any ground on which the patent could be revoked under section 64 of the Act.

Question 10.
Enumerate the acts that do not amount to infringement.
Answer:
The law however enumerates certain exceptions to infringement:
(1) Experimental and Research: Any patented article or process can be used for the following purposes:

  • Experiment
  • Research
  • Instructing the pupils

It is also permitted to make, construct, use, sell or import a patented invention solely for the uses reasonably related to the development and submission of information required under any law for the time being in force, in India, or in a country other than India, that regulates the manufacture, construction, use, sale or import of any product. All such acts, if within the bounds as created above, cannot be challenged as infringing the rights of the patentee.

(2) Parallel Importation under certain conditions:
Patented articles or articles made by using the patented process can be imported by the government for its own use. Also, a patented process can be used by the government solely for its own use. Moreover, the government can import any patented medicine or drug for the purposes of its own use or for distribution in any dispensary, hospital, or other medical institution maintained by the government or any other dispensary, hospital, or medical institution notified by the government. [Section 27 & 47] Jurisdiction: The legal provisions with regard to jurisdiction are provided in Section 104 of the Patents Act, 1970. Before dealing with jurisdiction, it may be pointed out that the courts in India receive (a) Patent Administrative Cases and (b) Patent Infringement Cases. In patent administrative cases, the Indian Patent Office is the defendant.

These types of cases include dispute on grant of a patent, patent invalidation and upholding, and compulsory licensing. In patent infringement cases, patentees or patent assignees pursue damages against willful infringement conduct by the alleged infringer. These cases include infringement of patent, disputes relating to ownership of the patent, disputes regarding patent rights or right for an application, patent contractual disputes, contractual disputes of assignment of the patent right, patent licensing, and disputes relating to the revocation of patents.

Period of Limitation:
The period of limitation for instituting a suit for patent infringement is there years from the date of infringement.

The burden of Proof:
The traditional rule of burden of proof is adhered to with respect to patented product and accordingly in case of alleged infringement ^ of a patented product the ‘onus of proof rests on the plaintiff. However, the TRIPS-prompted amendment inserted by way of Section 104 (A) has ‘reversed burden of proof’ in case of infringement of patented process. Under the current law, the court can at its discretion shift the burden of proof on the defendant, in respect of process patent if either of the following two conditions is met:

(1) the subject matter of the patent is a process for obtaining a new product, or

(2) there is a substantial likelihood that an identical product is made by the process and the plaintiff has made reasonable efforts to determine the process actually used but has failed. [Section 104 (A)]

While considering whether a party has discharged the burden imposed upon him under Section 104(A), the court shall not require him to disclose any manufacturing or commercial secrets, if it appears to the court that it would be unreasonable to do so.

Question 11.
What are the different types of Patent Infringement?
Answer:
Types of Patent Infringement
There are different ways a patent could be infringed. Some of the types of patent infringements include:
(1) Direct Infringement:
This occurs when a product covered by a patent is manufactured without permission. Direct patent infringement is the most obvious and the most common form of patent infringement. Basically, direct patent infringement occurs when a product that is substantially close to a patented product or invention is marketed, sold, or used commercially without permission from the owner of the patented product or invention.

(2) indirect Infringement and Contributory infringement:
An indirect infringer may induce infringement by encouraging or aiding another in infringing a patent. Indirect patent infringement suggests that there was some amount of deceit or accidental patent infringement in the incident. For instance, A holds a patent for a device, and B manufactures a device that is substantially similar to A’s device. Bis supplied with a product from another person C to facilitate the manufacturing of the B’s device. If the device so manufactured by B infringes upon A’s patent, then person C indirectly infringes A’s patent. Further, if such a product is knowingly sold or supplied, it may lead to “contributory infringement”. In the above example, if person C knowingly supplies the product to B then the infringement is construed as contributory infringement.

(3) Contributory Infringement:
This occurs when a party supplies a direct infringer with a part that has no substantial non-infringing use.

(4) Literal Infringement:
This exists if there is a direct correspondence between the words in the patent claims and the infringing device.
Even if an invention does not literally infringe the patent, it may still infringe under the doctrine of equivalents. A device that performs the substantially same task in substantially the same way to achieve substantially the same result infringes the patent under this doctrine. If the court finds infringement, it must still determine whether the infringement was. willful.

(5) Willful Infringement:
Willful infringement involves intentional disregard for another’s patent rights and encompasses both direct and intentional copying and continued infringement after notice. Patent users and inventors should employ patent attorneys to ensure that the use of a patent is valid and non-infringing. Even if the infringement is later found, the attempt to secure a legal opinion is evidence that the infringement was not willful.

CS Professional Intellectual Property Rights Laws and Practices Notes

Regulatory Framework of Insurance Business in India – Insurance Law and Practice Important Questions

Regulatory Framework of Insurance Business in India – Insurance Law and Practice Important Questions

Question 1.
Distinguish between the following:
(i) ‘Insurance agent’ and ‘broker’.
Answer:
(i) The key difference between the insurance agent and broker is that while an agent represents a single insurance company, the broker will represent the client and has to get the best deal among the various insurers. The brokers are also bound by a code of conduct to inform clients of major restrictions or changes in the cover and assist them in negotiating claims.

Question 2.
Distinguish between ‘nomination’ and ‘assignment’ with an example.
Answer:
Following are the points of Difference between ‘Nomination’ and ‘Assignment’

Nomination Assignment
1. Nomwiation is appointing some person(s) to receive policy benefits only when the policy has a death claim. Assignment is transfer of rights, title and interest of the policy to some person(s).
2. In other words, by merely nominating someone, the right, title and interest of the insured over the policy is not transferred straightforwardly to that nominated person and remains with the insured person only. In other words, the insurer is bound to pass over the benefits, claims and/or interests to the assigned person(s). Even during the time the insured is alive (or even prior to the death of the insured person).
3. Nomination is done at the instance of the insured. Along with the instance of the insured, consent of insurer is also required.
4. It can be changed or revoked several times. Normally assgrment is done once or twice during the policy penod. Assignment can be normally revoked after obtaining the ‘no objection certificate” from the concerned Assignees.
5. No attestation ¡s prescribed In the case of nomination. Attestation is required in case of assignment.
6. In case of nomination, the money will be paid to the nominee if he survives the assured. In case of assignment, money under the policy shall be paid to the assignee.
7. Nomination is made without consideration.

 

Assignment of a lite policy may be with or without consideration.

 

Question 3.
Distinguish between agenr and ‘broker’.
Answer:
Following are the points of difference between ‘Insurance agents’ and ‘insurance brokers’.

Insurance Agent Insurance Broker
Section 2(10) of the Insurance Act, 1938, defines an Insurance Agent as an insurance agent who receives or agrees to receive payment by way of commission or other remuneration in consideration of his soliciting or procuring insurance business including. business relating to the continuance, renewal or revival of policies of insurance. Regulation 2(I) of the IRDA (Insurance Brokers) Regulations, 2002 defines insurance Broker as a person for the time being licensed by the Authority under Regulation 11, who for remuneration arranges Insurance contracts with insurance companies and/or reinsurance companies on behalf of his clients.
2. In simple words Insurance agents are insurance professionals that serve as an intermediary between the insurance company and the insured. As a board statement of law, an agent’s liability to their customers is administrative. Insurance brokers can be best described as a kind of super-independent agent. Brokers can offer a whole host of insurance products for you to consider.
3. An Insurance Broker represents the client. An Insurance Agent represents the insurance company.
4. An Insurance Broker is licensed to recommend the products of any insurance company. Insurance Agent at any point time can sell the insurance products of only one insurance company with which he is attached.
5. The main duties of agents are timely and accurate processing of forms, premiums, and paperwork. Brokers have the duty to analyze business and secure correct and adequate coverage for the business.

Question 4.
Attempt the following:
(i) Describe the role of insurance ombudsman in redressal of complaints relating to claims.
(ii) What do you understand by ‘insurable interest’ and ‘reasonable premium’? How is the insurable interest created?
(iii) State the procedure for appointment and licensing of surveyors.
Answer:
(i) Insurance Ombudsman:
The Governing body shall appoint one or more persons as Ombudsman for the purpose of resolving insurance disputes.

Persons eligible to be appointed as Insurance Ombudsmen:
Only the following persons shall be eligible to be appointed as Insurance Ombudsmen:

  • Persons who served in the capacity of Chairman or Managing Director in Public Sector Insurance Companies.
  • Persons who have served the Indian Administrative Service or the Indian Revenue Service.
  • Persons who are retired Judges of the Supreme Court or the High Courts.

An Ombudsman shall be appointed by the Governing body from a panel prepared by a Committee comprising of:

  • Chairman, IRDA
  • Two representatives of Insurance council including one each from Life Insurance business and from General Insurance respectively.
  • One representative of Central Government.

Term of office and Remuneration of Ombudsmen:
An Ombudsman shall serve for a term of three years and shall be eligible for reappointment. However, an Ombudsman shall not hold office after he or she attains the age of 65.
The Ombudsman shall be paid salary of ₹ 80,000 per month and any pension to which he is entitled from Central Government or Statement Government or any other organization or institution shall be deducted from his salary.

Powers of Ombudsmen:
An Ombudsmen is empower to entertain the following disputes:

  • A complaint as specified under Rule 13.
  • Partial or total repudiation of claims by an insurer.
  • Dispute with regard to the premium paid or payable in terms of the policy.
  • Dispute on the legal construction of policies with regard to claims.
  • Delay in settlement of claims.
  • Dispute on the legal construction of policies with regard to claims.
  • Delay in settlement of claims.
  • Non-issuance of any insurance document to customers after receipt of premium.

Procedure for making a Complaint:
Any person who has a grievance against the insurer may himself or through the legal heirs make a complaint in writing to the Ombudsman within whose jurisdiction the branch or office of the insurer complained against is located.

The Complaint shall be in writing duly the complainant or through his legal heirs and shall state clearly the name and address of the complainant, the name of the branch or office of the insurer against which the complaint is made, the fact giving rise to the complaint, supported by the documents, if any, relied on by the complainant, the nature and extent of the loss caused to the complainant and the relief sought from the Ombudsman.

In order that a complaint is entertained before the Ombudsman, the following conditions must be satisfied:

  • The complaint must have first exhausted the remedies available within the insurance company for settling the grievance and approach Ombudsman only if either the insurance company rejects the grievance or complainant not satisfied with the reply or the insurer fails to respond within one month of submission of the grievance.
  • No complaint can be preferred before the Ombudsman after one year from the date of rejection of final letter from the insurance company on the representation made by the complainant.
  • If the complainant has not preferred alternative legal remedies and the proceedings are not pending before any Court or Consumer forum.

(ii) ‘Insurance interest’ and ‘reasonable premium’:
The premium to be charged should be reasonable so as to leave a small margin of profit for the insurer after meeting the expenses and at the same time it should be sufficient to sustain the contingencies which have to be met under the policy. Insurable interest can be referred to the right to insure arising out of a financial relationship recognized under law.

Insurable interest is said to exist when the person insuring stands to lose if the event insured against occurs. The courts in India have consistently held that an insurance of the life of a person in which the person affecting the insurance has no interest is void as a wagering contract under Section 30 of the Indian Contract Act. Insurable interest is thus a legal prerequisite for insurance. Insurance is a contingent contract to do or not to do something if some event collateral to such contract does or does not happen.

(iii) Licensing Procedure:
Regulation 3 of the Insurance Surveyors and Loss Assessors
(Licensing, Professional and Code of conduct)

Regulations, 2000 specifies the requirements for issue of a licence:

He holds a degree in any branch of engineering (or) Postgraduate diploma in general insurance issued by Institute of Insurance and Risk Management (or) a Degree in Agriculture (or)

He is a member of the Institute of Chartered Accountants of India or the Institute of Cost and Works Accountants of India (or)

He possesses actuarial qualifications or holds a degree or diploma of any recognised university or an institute in relation to insurance (or)

He holds a diploma in insurance granted or recognised by the Government (or)

He holds such other technical qualifications as prescribed by IRDA (and)

He does not suffer from any of the disqualifications mentioned in Section 42(4) Where the entity is a company or a firm, all the directors or partners shall possess one of the qualifications as prescribed above and none of the directors or partners suffer from any of the disqualifications mentioned as above (and)

Payment of fees based on the categorisation of the applicant (and)

Has undergone practical training as a Student-member under a licensed Surveyor and Loss Assessor (who shall be a Fellow or Associate member of the Institute) for a period of 12 months as contained in Chapter VII (persons who have more than 15 years experience in risk management and general insurance are exempt from this training) (and)

Has passed the Surveyor examination conducted by the Insurance Institute of India or such other institute recognised by IRDA (and)

Has undergone the special training provided by the Indian Institute of Surveyors and Loss Assessors for 100 hours for Fellowship, 50 hours for Associate and 25 hours for Licentiate level (and)

He attends seminars and workshops organised by the Institute for a minimum number of seminars, viz., 10 seminars for fellowship, 8 for Associateship and 5 for Fellowship level.

Question 5.
What is the grievance redressal mechanism available to the insured?
Answer:
IRDA (Protection of Policyholders’ Interests) Regulations, 2002 provide that every insurer shall have in place proper procedures and effective mechanism to address complaints and grievances of policyholders efficiently.

The Grievance redressal mechanism available to the insured are:

  • Grievance cell of Insurance companies
  • Ombudsman
  • Consumer Protection Act, 1986
  • Grievance Redressal Authorities (GRA) which has been suggested by the Law Commission.

The IRDA regulations provide that every insurer shall communicate to the policyholder information in respect of insurance ombudsman along with the policy document and as may be found necessary. The ombudsman shall act as councillor and mediator in matters within its terms of reference. His decision as to whether the complaint is fit and proper for being considered by it or not shall be final.

The insurance ombudsman may receive and consider complaints relating to partial or total repudiation of claims relating to the following:

  • Any dispute regarding premium paid or payable in terms of the policy;
  • any dispute on the legal construction of the policy relating to claims;
  • Delay in settlement of claims; and
  • Non-issue of any insurance document to customers after receipt of premium.

Question 6.
Attempt the following :
Describe the role of the ‘Insurance Ombudsman’ in resolving the complaints relating to settlement of insurance claims.
Answer:
Insurance Ombudsman:
The Governing body shall appoint one or more persons as Ombudsman for the purpose of resolving insurance disputes.

Persons eligible to be appointed as Insurance Ombudsmen:
Only the following persons shall be eligible to be appointed as Insurance Ombudsmen:

  • Persons who served in the capacity of Chairman or Managing Director in Public Sector Insurance Companies.
  • Persons who have served the Indian Administrative Service or the Indian Revenue Service.
  • Persons who are retired Judges of the Supreme Court or the High Courts.

An Ombudsman shall be appointed by the Governing body from a panel prepared by a Committee comprising of:

  • Chairman, IRDA
  • Two representatives of Insurance council including one each from Life Insurance business and from General Insurance respectively.
  • One representative of Central Government.

Term of office and Remuneration of Ombudsmen:
An Ombudsman shall serve for a term of three years and shall be eligible for reappointment. However, an Ombudsman shall not hold office after he or she attains the age of 65.

The Ombudsman shall be paid salary of ₹ 80,000 per month and any pension to which he is entitled from Central Government or Statement Government or any other organization or institution shall be deducted from his salary.

Powers of Ombudsmen:
An Ombudsmen is empower to entertain the following disputes:

  • A complaint as specified under Rule 13.
  • Partial or total repudiation of claims by an insurer.
  • Dispute with regard to the premium paid or payable in terms of the policy.
  • Dispute on the legal construction of policies with regard to claims.
  • Delay in settlement of claims.
  • Dispute on the legal construction of policies with regard to claims.
  • Delay in settlement of claims.
  • Non-issuance of any insurance document to customers after receipt of premium.

Procedure for Making a Complaint:
Any person who has a grievance against the insurer may himself or through the legal heirs make a complaint in writing to the Ombudsman within whose jurisdiction the branch or office of the insurer complained against is located.

The Complaint shall be in writing duly the complainant or through his legal heirs and shall state clearly the name and address of the complainant, the name of the branch or office of the insurer against which the complaint is made, the fact giving rise to the complaint, supported by the documents, if any, relied on by the complainant, the nature and extent of the loss caused to the complainant and the relief sought from the Ombudsman.

In order that a complaint is entertained before the Ombudsman, the following conditions must be satisfied:

  • The complaint must have first exhausted the remedies available within the insurance company for settling the grievance and approach Ombudsman only if either the insurance company rejects the grievance or complainant not satisfied with the reply or the insurer fails to respond within one month of submission of the grievance.
  • No complaint can be preferred before the Ombudsman after one year from the date of rejection of final letter from the insurance company on the representation made by the complainant.
  • If the complainant has not preferred alternative legal remedies and the proceedings are not pending before any Court or Consumer forum.

Question 7.
You are running a business subject to market risks. You want to procure from an insurance company a comprehensive cover. You are informed that agents and brokers are insurance intermediaries who will help you to negotiate a proper cover with an insurer. As a business person seeking a cover, who will you approach for discussions and guidance in this regard – an agent or a broker? Give reasons for your answer.
Answer:
Insurance intermediaries facilitate the placement and purchase of insurance and provide services to insurance companies and consumers that complement the insurance placement process.
The insurance market has different categories of intermediaries- agents, brokers etc. Even among the agents, we have a category of corporate agents. All these intermediaries as a professional job role and help in the growth of the insurance market.

The types of intermediation that are required depends wholly on the nature of cover required the risks inherent in the business carried on the protection that is offered by an insurer. The professional attachments of the intermediary and the reputation of the insurer among the various things. The insurance companies even in respect of fire loss of projects cover etc. have standard cover which lay down the application and these are available off the shelf as one can say.

A commercial policy is normally to be obtained from a General Insurance Company; a product of this type is a short term cover subject to renewal periodically and also governed by commercial principles and practices.
The type of intermediation assistance in such a case will primarily be governed by the risk factors of the business. An agent is normally an employer/representative of an insurance company and frequently market products that have been developed his principal.

Though an agent has, as per IRDAI regulations to possess qualifications and be licensed, his jurisdiction is confirmed to the policies/products that have been developed by this principal unless the insurance company on being approached by a prospect for a special cover to meet its need shown as inclination, the prospect is not served to his full requirements. Hence, in most cases business requiring special provisions or are faced with specific underlying risks will not be effectively serviced by an agent. One thing that has to be noticed in this case is that an agent is a paid his commission from this insurer.

On the other hand, a broker is a free professional attached to any insurance company and is enabled to carry as his profession on the strength of a license granted by IRDAI. A broker has to satisfy financial obligations to set up a profession and has to be qualified. He will be subject to the discipline of the IRDAI. As part of his works as broker will study the risk perceptions of business various alternatives that are available to control risk and design a suitable policy for the business which he will then take to an insurer and obtain a cover.

Normally, a broker will also help a business to negotiate with the insurer the obtainment of a cover and in case of claim pursue the matter with the insurer and collect the claim. A broker gets paid by the inured for his efforts and the scale of remuneration is fixed by IRDAI.

As in this situation for running the business the business person seeking a cover of market risk wants to procure a insurance comprehensive cover for that he should approach for discussion and guidance he should approach to a broker.

As a technical matter, a broker’s role may change during an insurance transaction and over the course of an ongoing relationship with a client. Many brokers sometimes act as an “agent” of the insurer and other times as a “broker” of the client when assisting a client with insuring its risk exposures through an insurance contract with a traditional carrier.

As a practical matter, regardless of the legal role in which a broker is acting, the manner in which the broker approaches all such placements for his clients is as an intermediary – working on behalf of his clients to facilitate the consummation of insurance contracts with carriers who have the ability and capacity to properly insure his risks. On a balance in case of business where a straitjacketed policy will not be useful, the engagement of a broker will be the most ideal.

Question 8.
Describe the steps taken by the Indian insurance regulator to protect the interests of the policyholders. (5 marks)
Answer:
Indian insurance regulator namely, Insurance Regulatory and Development Authority of India (IRDAI) has put forth many measures to protect the policyholders’ interests. Insurers have been told to strengthen their grievance redress procedures, consumer complaint resolving procedures where they are found weak.

An important step taken by IRDA is that it has made it compulsory that each company forms a Policyholder Protection Committee in the Board of Directors. This is part of the corporate governance guidelines issued by IRDA and will have the effect of ensuring that insurers’ internal systems are monitored effectively at the highest level of the company, that is, the Board. IRDAI has made a regulation for Protection of Policyholders’ Interests Regulations, 2017.

These regulations are aimed to protect the policyholders from undue inconvenience, fraud and similar matters.
These Regulation cover:

  • Board approved policy for protection of interests of policyholders
  • Point of sale
  • Products on offer/products withdrawn
  • Proposal for insurance
  • Matters to be stated in life insurance policy

Question 9.
Under international supervisory guidelines prescribed by the International Association of Insurance supervisors, one of the requisite parameters for a home regulator is to be operationally independent, transparent and accountable. Does the Indian insurance regulator comply with this requirement? Discuss.
Answer:
One of the core principles internationally adopted by International Association of Insurance Supervisors (IAIS) is to ensure the Regulators’ Independence and make its role transparent and accountable. All the home supervisors in the area that are members of IAIS to ensure that the supervisor adheres to the accepted and recognized cannons of supervisory procedure. The independence of the regulator is one of these.

Independence of the regulator can be ensured broadly in two main areas-the technical and the financial administrative areas. As per as IRDAI is concerned both these areas have been recognized and ensured to be adopted either by law or by procedure.

As regards the technical area, the authority is to consist of members, directors from various areas of technical attainments and proficiency. The members including the Chairman who enjoys supervising powers of the Authority itself are appointed by the Central Government on the basis of fit and proper criterion. Professional qualifications and experience are necessary.

The IRDAI enjoys complete freedom in the matter of regulating the business of insurance in India. It also has the powers to grant registration to the new players. The powers to make regulations to govern the market are wholesome except that the regulations have to be placed before the advisory committee which is appointed by the chairman of the Authority.

The Act clearly states that in all technical matters the decision of the Authority is final. There can be no interference from the government. In all administrative matters, the Government after hearing the Authority can express its views. The Authority will produce art Annual Report that has to be presented to the Parliament.

As regards financial freedom, the Authority does not receive any grant from the Government. The Authority has been permitted by the Act to raise and levy fees as percentage of the premium income of the insurers which is used for its administration and maintenance. Here again the maximum of such fees has been laid down that enables the Authority to be free from the influence of any large or significant insurer.

It is thus seen that the enactment of the Insurance and the IRDA Act has ensured the independence of the Authority from the influence of the Government and also of the insurers.

Question 10.
Explain the role of insurance intermediaries in Insurance business. Explain the relevant provision of the Insurance Act, 1938, which gives protection to Agents who have served the insurance company for at least 5 years.
Answer:
Role of Intermediaries in Insurance Industry Innovative Marketing:
Insurance intermediaries bring innovative marketing practices in the insurance marketplace. This deepens and broadens insurance markets by increasing consumers’ awareness of the protections offered by insurance, their awareness of the multitude of insurance options and their understanding as to how to purchase the insurance they need.

Dissemination of information to Consumers :
intermediaries provide customers with the necessary information required to make educated purchases/ informed decisions. Intermediaries can explain what a consumer needs, and what the options are in terms of insurers, policies and prices. Faced with knowledgeable client base that has multiple choices, insurers will offer policies that fit their customers’ needs and at competitive prices.

Dissemination of information to the marketplace :
Intermediaries gather and evaluate information regarding placements, premiums and claims experience.

Sound Competition :
Increased consumer knowledge ultimately helps increasing the demand for insurance and improve take-up rates. Increased utilization of insurance allows producers of goods and services to make the most of their risk management budgets and take advantage of a more competitive financial climate, thereby, boosting economic growth.

An insurance agent is paid commission for every premium received till death or maturity or the premium paying period on the policies sourced by him on behalf of an insurance company.
However, where the Agent is terminated, the commission on the premiums paid subsequent to the date of termination stands normally forfeited.
However, Section 44 of the Insurance Act gives protection to Agents who have served the insurance company for at least 5 years.

Therefore, where the services of an insurance agent is terminated after the Agent has served the insurer continually for a period of 5 years, the insurer is required to pay renewal commission on premiums received subsequent to termination on policies sourced prior to termination, if the following conditions are satisfied:

  • If the agent has not been terminated on the grounds of fraud.
  • That policy amounting to not less than ₹ 50,000 of sum insured by the agent were in force on a date one year before his agency to act as an agent of the company.
  • That the renewal commission due to him shall not exceeds 4%.

The section also empowers that the commission shall be payable to the legal heirs of the agent after his death says for 5 years, as levy on such commission is payable had such agent been alive.

Question 11.
As a Compliance Officer, how would you ensure that your Company is not penalised for “penalty payments” highlighting the powers of IRDAI under section 44, 102, 105B or 105C in particular.
Answer:
As a compliance officer every Company Secretary of an insurance company first and foremost ensure due diligence and compliance with the various provisions under the IRDAI guidelines and regulations.
The IRDAI is empowered under various section to impose penalties on insurance companies for default in company with the provisions under the Act.

The power of IRDAI under sections 44, 102, 105B and 105C are discussed below:
Under section 44A of the Insurance Act, 1938, for the purposes of ensuring compliance with the provisions of sections 40A, 40B, 40C, 42B and 42C the Authority may by notice.
(a) require from an insurer, principal-agent, chief agent, or special agent such information certified, if so required by an auditor or actuary, as he may consider necessary

(b) require an insurer, principal-agent, chief agent, or special agent to submit for his examination as the principal place of business of the insurer in India, any book of account, register or other documents, or to supply any statement which may be specified in the notice

(c) examine any officer of an insurer or a principal-agent, chief agent or special agent on oath, in relation to any such information, book, register, document or statement and administer the oath accordingly; and an insurer, principal-agent, chief agent or special agent shall comply with any such requirement within such time as may be specified in the notice.

Under Section 102: It empowers IRDAI to impose a penalty not exceeding five lakh rupees for each such failure and punishable with fine for an insurance company:

  • Failure to furnish any document, statement, account, return or report to IRDAI.
  • Failure to comply with the directions (Section 34 empowers India. to issue directions if it is satisfied to do so in the interests of public or for prevention of affairs being conducted detrimental to policyholders or to secure proper management of any insurer).
  • Failure to maintain the required solvency margin.
  • Failure to comply with the directions on the insurance treaties.

Under Section 105B: It empowers IRDAI, if an insurer fails to comply with the provisions of section 32B, he shall be liable to a penalty not exceeding five lakh rupees for each such failure and shall be punishable with imprisonment which may extend to three years or with fine for each such failure.

Under Section 105C: ft empowers IRDAi, if an insurer fails to comply with the provisions of section 32C, he shall be liable to a penalty not exceeding twenty-five lakh rupees for each such failure and in the case of subsequent and continuing failure, the registration granted to such insurer under section 3 shall be cancelled by the Authority.

Question 12.
An employee of a government organization purchased a life insurance policy on 28-04-2011. It was a non-medical scheme policy as he was an employee of government organization and no medical examination was conducted. The above policy lapsed due to non-payment of premium which was due from April 2012 to October 2012.

The life assured got the policy revived on 03-01 -2013 by depositing the premium which was due. Unfortunately, the life assured died on 13-01 -2013. The legal heirs of the assured submitted a claim with the insurance company with respect to the above-said policy. As the life assured died within 2 years from the date of obtaining the policy and within ten days of the revival of the policy, the insurance company carried out an investigation for the policy and the life assured.

The investigation revealed that the life assured was not keeping good health at the time of obtaining the policy and as well as at the time of revival of the policy because his employer organization had supplied the details of earned leave and medical leave availed by the life assured during his service period w.e.f. 04-06-2007 to 18-09- 2012. The details given for the leave were as under:

Medical leave
12- 05-2008
30-05-2008 to 27-06-2008 27-07-2008 to10-09-2008 06-08-2010 to 13-08-2010
13- 06-2011 to 06-08-2011 05-09-2012 to 18-09-2012

The fact of the medical leave was made known to the insurance company only on investigation and the fact that the life assured was suffering also came to their knowledge. The fact was not disclosed by the life assured in the original proposal form at the time taking the policy as well as at the time of revival. The life assured was suffering from epigastria C bleeding per rectum due to which he died in the hospital on 13-01-2013 where he was admitted on 04-01 -2013. Thus, it was a clear case of concealment on the part of the life assured which was against the terms of the insurance policy. Accordingly, the insurance company repudiated the claim.

The legal heirs of the life assured challenged the repudiation of the claim in District Consumer Forum where the claim was awarded in their favour and against the insurance company.
The insurance company aggrieved by the decision of the District Consumer Forum filed an appeal with the State Commission where the appeal was accepted and the decision of the District Consumer Forum was set aside.

Based on the above case, answer the following questions:

(i) Was there a violation of ‘non-disclosure of material fact’ in the case?
If so, state the insurance principal that governs such instances. What is the validity of the contract of insurance?

(ii) Discuss the implications of section 45 of the Insurance Act, 1938 with regards to facts of the present case given.

(iii) Having issued a Life Insurance Policy on a ‘non-medical scheme’, do you think the Insurance Company is justified in repudiating the claim? Was there lapse in ‘Underwriting”? Discuss.

(iv) Do you think the claim of the legal heirs is justified in the absence of any medical issues of the employee?
(v) Given the facts of the case, what precautions and advises do you suggest to people taking insurance policies to cover their risks?
Answer:
(i) Insurance contract is an agreement between two parties based on certain principles which are essentials of an insurance contract. If any of the principles are not complied,then the contract is voidable at the option of the aggrieved party.

A material fact is one which would have influenced the judgment of a prudent insurer in deciding whether he would accept the risk in whole or in part and, if so, at what amount of premium. The materiality of a fact depends upon the application of this test to the particular circumstance of the case as at the date of taking the policy and at the time of revival that the fact should have been communicated.

Material facts may have a bearing on the physical hazard or on the moral hazard, or they may show that if a loss occurs the insurer’s liability is likely to be greater than would normally be expected.
Here, in this case, the person assured was required to state the facts about his health in the proposal form while taking the insurance policy. This is required under the very first and most basic principle of uber rimae fidei or the principle of utmost good faith.

According to this principle, the insurance contract must be signed by both the parties (i.e. insurer and insured) in an absolute good faith or belief or trust, both the insured and the insurer should have good faith towards each other. – in the present case, the policyholder was suffering from epigastria C bleeding per rectum due to which the person died. The insured must provide the insurer complete and clear information of subject matter. In the case cited, the insured while signing the proposal form was required to give all the facts about his health which was an information material to the contract.

The principle of utmost good faith very clearly state that the person getting insured must willingly disclose and surrender to the insurer the complete and true information regarding the subject matter of insurance. The insurer’s liability Bets void (i.e. legally revoked or cancelled) if any facts about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong manner by the insured.

Thus there was a clear case of non-disclosure of material facts regarding health conditions by the life assured. In a Contract of Insurance, any fact which would influence, the mind of a prudent insurer in deciding whether to accept or not to accept the risk is a “material fact”. If the proposer has knowledge of such fact, he is obliged to disclose it, particularly while answering questions in the proposal form. Needless to emphasize that any inaccurate answer will entitle the insurer to repudiate his liability because there is clear presumption that any information sought for in the proposal form is material for the purpose of entering into a Contract of Insurance.

On the basis of above discussion the Contract of insurance is void.
The claim under the insurance policy was made by the legal heirs of the person assured after his death. As stated in the case the policy was taken by the person assured on 28.04.2011. Further, the policy lapsed due to non-payment for the period from April 2012 to October 2012.

The policy was revived by the assured on 03.01.2013 by paying the overdue premium. Unfortunately, the person assured died on 13.01.2013 which was just 10 days after the revival of the policy. The insurance company carried out the investigation into the cause of death of the assured as per section 45 of the Insurance Act 1938.

Section 45 of the Insurance Act 1938 states that Policy not to be called in question on ground of misstatement after two years. No policy of life insurance effected before the commencement of this Act shall after the expiry of two years from the date of commencement of this Act and no policy of life insurance effected after the coming into force of this Act shall after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement.

The implication of section 45 of the Insurance Act, 1938 :
1. was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy-holder and that the policy-holder knew at the time of making it that the statement was false.

2. or that it suppressed facts which it was material to disclose. Provided that nothing in section 45 of the Insurance Act, 1938 shall prevent the insurer from calling for proof of age at any time if he is entitled to do so, and no policy shall be deemed to be called in question merely because the terms of the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in the proposal.

In the given case, the death of the life assured occurred less than 2 years of taking the policy and within 10 days of the revival of the policy. Due to this short period of taking up of the policy and death of the life assured there could be doubt about the intentions and doubts about the cause of death. Thus the investigation into the cause of death was carried out before processing of the claim under section 45 of the Insurance Act, 1938. This period of 2 years has now been amended to 3 years. Hence the Insurance Company has the legal right to call for and claim that there was suppression or non-disclosure of material fact and leave the clause.

The facts stated in the case indicate that the life assured was suffering from epigastria C bleeding per rectum. He had been taking medical leave very frequently which is evident from the records provided by the employer of the life assured. In a short period of less than two years he had taken medical leave more than six times.

Had the life assured mentioned the fact about the health condition in the proposal form, the insurance company based on condition of the existing critical illness would have rejected the proposal or might have carried out further medical examination as required for acceptance of the proposal for the applicants other than employees of government organisation. Looking at the health records the proposal would have been rejected by the insurance company.

However, the policy is issued on non-medical basis, the company would have not got any information about the health condition of Life assured then the company would have taken precautions and increased the premium as it was a non-medical policy. Though the policy is issued on non-medical basis but the life assured is duty-bound to disclose all material facts that would have influenced the judgment of a prudent insurer in deciding whether he would accept the risk in whole or in part and, if so, at what amount of premium.

Hence, the insurance company is justified in repudiating the claim. There is no lapse in the underwriting process of the company due to being a non-medical scheme. The policy issued on the basis of non-medical is just a feature provided by the insurance company. The policy issued under non-medical is based on the risk appetite of the insurer, sum assured, age of the insured and employment details.

The investigations were carried out as required under section 45 of the Insurance Act, 1938. However, if the investigation would not have shown any health problems found with the life assured then it would have satisfied all the requirements of the claim made under the policy.

Thus if the investigation does not result in any problem with the health conditions of the life assured then there was no non-disclosure of any material fact related to subject matter of insurance. So there is no reason for the insurance company to treat the contract as void and the claim as filed under the Insurance policy would be payable to the legal heirs of the assured as per the conditions of the policy. Thus in such a situation, the claim of the legal heirs would be fully justified, in the absence of any medical issue of the life assured.

Insurance is a contract between two parties the insurer and the insured. This contract needs to comply with all the requirements of a contract for it to be valid. It is required that parties to the contract make all the disclosure about the terms and conditions of the contract as well as all the facts about the subject matter of the insurance contract.

In the given case, the life assured did not disclose the fact about the health conditions while submitting the proposal form due to which the insurance company was required to carry out the investigation and had the right to consider the contract as void due to non-disclosure of a fact which was material to the contract.
Thus, we would advise the person(s) taking insurance policy to make sure that before taking a policy they are aware of all the terms and conditions of the policy and also they disclose all the facts about the subject matter of the insurance policy.

The facts which must be disclosed are:

  • Facts, which show that a risk represents a greater exposure than would be expected from its nature e.g., the fact that a part of the building is being used for storage of inflammable materials.
  • External factors that make the risk greater than normal e.g. the building is located next to a warehouse storing explosive material.
  • Facts, which would make the amount of loss greater than that normally expected e.g. there is no segregation of hazardous goods from non-hazardous goods in the storage facility.
  • History of Insurance (a) Details of previous losses and claims (b) if any other Insurance Company has earlier declined to insure the property and the special condition imposed by the other insurers; if any.
  • The existence of other insurances.
  • Full facts relating to the description of the subject matter of Insurance.

Question 13.
Write short notes on:
(a) Constitution of IRDA
(c) IRDA Guidelines For Grievance Redressal
(d) IRDA Guidelines To Financial Inclusion
Answer:
(a) Constitution Of Insurance Regulatory And Development Authority:
The IRD Act has established the Insurance Regulatory and Development Authority (“IRDA” or “Authority”) as a statutory regulator to regulate and promote the insurance industry in India and to protect the interests of holders of insurance policies.

The IRDA Act also carried out a series of amendments to the Act of 1938 and conferred the powers of the Controller of Insurance on the IRDA. The members of the IRDA are appointed by the Central Government from amongst persons of ability, integrity and standing who have knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration etc. The Authority consists of a chairperson, not more than five whole-time members and not more than four part-time members.

Every Chairperson and member of IRDA appointed shall hold office for a term of five years. However, Chairperson and member of IRDA appointed shall not hold office once he or she attains 65 years while whole-time members shall not hold office beyond 62 years.

Central Government may remove any member from office if he or she is adjudged insolvent or is physically or mentally incapacitated or has been convicted of an offence involving moral turpitude or has acquired financial or other interests or has abused his position. Chairperson and the whole-time members shall not for a period of two years from the date of cessation of office in IRDA, hold office as an employee with Central Government or any State Government or with any company in the insurance sector.
Answer:
(c) Irda Guidelines For Grievance Redressal:
In order to enforce timely redressal of Customer grievance, the Insurance Regulatory and Development Authority (IRDA) has issued guidelines for grievance redressal by insurance companies.

A Grievance is defined as an expression of dissatisfaction by a customer on the action or inaction on the standard of service of an insurance company or any intermediary and asks for remedial action. It is distinguished from inquiry or a request which is seeking information or requesting for a service and are not considered as Grievances.

Every insurance company shall have a designated senior officer at the level of CEO or Compliance Officer of the Company as the Grievance Officer. Further, every office of the insurer shall also have a designated Grievance officer for such office.

The process for handing a Grievance is as follows:

  • Every grievance shall be acknowledged within 3 working days of receipt of grievance, containing the name and designation of the person who will deal with the grievance.
  • The Grievance redressal procedure including the time taken for resolution of disputes shall be mentioned in the acknowledgement.
  • Normally a Grievance shall be resolved within 3 days. However, where it is possible to resolve within 3 days, the insurer shall resolve the complaint within 2 weeks and shall send a final letter of resolution.
  • Where a complaint is rejected, the reasons shall be clearly stated along with the recourse available if the customer is still dissatisfied.
  • Further, if the insurer shall inform the customer that if the customer does not come back within 8 weeks from the date of providing resolution, the grievance shall be treated as closed.
  • A grievance can be closed only if the following conditions are satisfied:

1. Where the insurance company has acceded to customer’s grievance, upon acceding to the request of the customer.

2. Where the insurance company rejects the customer’s grievance, upon receipt of a communication from customer accepting the company’s the company’s resolution.

3. Where the insurance company rejects the customer’s grievance and the customer does not respond within 8 weeks of receipt of resolution, upon completion of the 8 weeks.

4. In all the above instances, the Grievance Redressal Officer shall certify that the Insurance company has discharged its contractual, statutory or regulatory obligations.
Answer:
(d) Irda Guidelines To Financial Inclusion:
Insurance Regulatory & Development Authority (IRDA) has been making immense efforts to educate and empower the common citizens about insurance industry in India and their rights & responsibilities. IRDA has been at the forefront of insurance sector deepening, protecting the rights of policyholders, regulating insurance companies & advisors and bringing about insurance inclusion in India for all segments esp. the poor. Some of the steps taken by IRDA for financial inclusion include.

1. National Strategy for Financial Education:
The Insurance Regulatory and Development Authority (IRDA) has released the draft National Strategy for Financial Education for comments and feedback in Year 2012. The final strategy is yet to be notified by the IRDA.

The National Strategy recognises that financial literacy and financial education play a vital role in financial inclusion and inclusive growth and envisages ways towards creating awareness and educating consumers on access to financial services, availability of various types of products and their features; changing attitudes to translate knowledge into responsible financial behaviour; and making consumers of financial services understand their rights and obligations.

2. Website on insurance Education:
In an attempt to increase insurance awareness levels across the country, the authority has taken a number of consumer education initiatives and has recently launched an exclusive insurance education website www.ploicyholder.gov.in

This website has self-explanatory menus and gives information in simple language on topics such as:

  • Buying insurance.
  • Making a claim.
  • Policyholder Protection and Grievance Redressal.
  • Handbooks in 13 languages.
  • Do’s and Don’ts for a policyholder.
  • Comic series.
  • Consumer Affairs Annual Booklets.

3. Grant of Corporate Agency license to Department of Postal:
To promote financial inclusion, insurance regulator Insurance Regulatory and Development Authority (IRDA) has granted corporate agency license to the Department of Post for distributing insurance products.

4. Emphasis on education insurance agents to weed out mis-spelling: India’s Insurance Regulatory and Development Authority (IDA.) has been chalking out an ambitious plan to combat misselling, a menace that has been haunting the industry for about a decade now, especially after the emergence of equity-oriented insurance products.

Question 14.
Write a short note on role and functions of Insurance companies.
Answer:
Role And Function Of Life Insurance Companies:
Life Insurance Companies in India have a big role to play. It is the life insurance Companies which collects the savings of a person and converts into the wealth.

The functions and role of Life Insurance Company may be understood as:
1. Saving Institution:
Life insurance companies both promote and mobilises saving in the country. The income tax concession provides further incentive to higher income persons to save through LIC’s policies. The total volume of insurance business has also been growing with the spread of insurance- consciousness in the country.

2. Term Financing Institution:
Life Insurance Companies also functions as a large-term financing institution (or a capital market) in the country. The annual net accrual of investible funds from life insurance business (after making all kinds of payments liabilities to the policyholders) and net income from its vast investment are quite large. During 1994-95, LIC’s total income was ₹ 18,102.92 crore, consisting of premium income of ₹ 1152,80 crore investment income of ₹ 6,336.19 crore, and miscellaneous income of ₹ 238.33 crore.

3. Investment Institutions:
LIC is a big investor of funds in government securities. Under the law, LIC is required to invest at least 50% of its accruals in the form of premium income in government and other approved securities.
LIC funds are also made available directly to the private sector through investment in shares, debentures, and loans. LIC also plays a significant role in developing the business of underwriting of new issues.

4. Stabiliser in Share Market:
LIC acts as a downward stabiliser in the share market. The continuous inflow of new funds enables LIC to buy shares when the market is weak. However, the LIC does not usually sell shares when the market is overshot. This is partly due to the continuous pressure for investing new funds and partly due to the disincentive of the capital gains tax.

5. Biggest Employers in Economy: Life Insurance Companies in India are one of the biggest employers. In addition to direct employment, Lakhs of People are getting the employment as Agents.

Question 15.
What are the regulations affecting General Insurance Business in India? Explain?
Answer:
Regulations Affecting General Insurance Business in India:
The following Acts affect, circumscribe or regulate in some way or the other, some aspect of the General

Insurance Business in India.

  • General Insurance Nationalization Act, 1972
  • Amendments to GIN Act, 1972
  • Multi-Modal Transportation Act, 1933
  • Motor Vehicles Act, 1988
  • Inland Steam Vessels Amendment Act, 1977
  • Marine Insurance Act, 1963
  • Carriage of Goods by Sea Act, 1925
  • Merchant Shipping Act, 1958
  • Bill of Lading Act, 1855
  • Indian Ports (Major Ports) Act, 1963
  • Indian Railways Act, 1989
  • Carriers Act, 1865
  • Indian Post Office Act, 1898
  • Carriage by Air Act, 1972
  • Workmen’s Compensation Act, 1923 ESI Act, 1948
  • Public Liability Insurance Act, 1991.

Question 16.
Discuss the dual role of IRDA in the present insurance market in India.
Answer:
Insurance Regulatory And Development Authority (IRDA):
The Committee on reforms of the insurance sector under the chairmanship of Shri R. N. Malhotra ex-governor of Reserve Bank of India recommended for the creation of a more efficient and competitive financial system in tune with global trends. It recommended amendments to regulate the insurance sector to adjust with the economic policies of privatization.

The government in pursuance of the recommendation of the committee decided to establish a Provisional Insurance Regulatory and Development Authority in 1996, to replace the erstwhile authority called the Controller of Insurance constituted under the Insurance Act, 1938, which initially worked under the Ministry of Commerce and later transferred to the Ministry of Finance.

Finally, the decision to establish the Insurance Regulatory and Development Authority was implemented by the passing of the Insurance Regulatory and Development Authority Act, 1999. In India, presently after the opening up of the insurance sector, the regulator for the monitoring of the operations of the insurance companies is the IRDA, having its head office in Hyderabad, the regulatory framework mainly aims to focus three areas, viz.,

  1. The protection of the interest of the consumers.
  2. To ensure the financial soundness of the insurance industry.
  3. To pave the way to help a healthy growth of the insurance market where both the government and the private players play simultaneously.

CS Professional Insurance Law and Practice Notes

Process Of Examination Of Patent Application – Intellectual Property Rights Laws and Practices Important Questions

Process Of Examination Of Patent Application – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
Write a brief note on the novelty of the invention,
Answer:
The novelty of Invention:
An invention is considered new (novel) if it has not been anticipated by publication” in any document anywhere in the world, or prior claimed in an application for patent in India, or form part of the knowledge, oral or otherwise, available within any local or indigenous community in India or elsewhere, or used; before the date of filing of a patent application or date of priority, whichever is earlier, that is, the subject matter has not fallen in the public domain or that it does not form part of the state of the art.

Followings are the general principles relating assessment of Novelty:

(1) An invention is considered as new if it is not anticipated by prior publication, prior use or prior public knowledge. An invention is new (novel) if it has not been disclosed in the prior art, where the prior art means everything that has been published, presented, or otherwise disclosed to the public before the date of filing of the complete specification.

(2) For the purpose of determining novelty, an application for Patent filed at the Indian Patent Office before the date of filing of the complete specification of a later-filed application but published after the same is considered for the purposes of prior claiming.

(3) While ascertaining novelty, the Examiner takes into consideration, inter alia, the following documents:

  • Which have been published before the date of filing of the complete specification.
  • Such Indian Patent Applications have been filed before the date of filing of complete specification and published on or after the date of filing of the complete specification, but claim the same subject matter.
  • Also, the Examiner may consider such documents which have been published before in a transaction of a learned society or exhibited before in an authorized manner as designated by the Government within one year from the date of such filing.

(4) A prior art will be considered as anticipatory if all the features of the invention under examination are present in the cited prior art.

(5) The prior art should disclose the invention either in an explicit or implicit manner.

(6) Mosaicking of prior art documents is not followed in the determination of novelty.

(7) A generic disclosure in the prior art may not necessarily take away the novelty of a specific disclosure.

(8) A specific disclosure in the prior art takes away the novelty of a generic disclosure.

(9) In a case where prior art is cited as an anticipation in the Examination Report, which is not deemed to be anticipation by reason on Section 29-34, the onus of proving is on the applicant.

Question 2.
Discuss the concept of the patent application.
Answer:
Publication of Patent Application: Usually a patent application is published in the Official Patent Office Journal after the lapse of 18 months from the date of filing of the application or the priority claimed to date, whichever is earlier. This publication includes all pertinent details related to the application. It includes the title, abstract, application number, and name and address of the applicant. After this publication, a patent application becomes open for public scrutiny.

An exciting concept of request for early patent publication is also available for the applicant. This can be done when the applicant wants his application to be published before the normal period of 18 months. Early publication basically stands for making a patent public before the time of its normal publication. This could be of help when one is planning to sell or license the patent or seek investor and related advantages. An early publication of an application is allowed as per Section 11 (A)(2) of the Indian Patents Act, on payment of the prescribed tee.

Section 11(A)(2) of the Indian Patents Act mentions:
The applicant may, in the prescribed manner, request the Controller to publish his application at any time before the expiry of the period prescribed under sub-section (1) and subject to the provisions of sub-section (3), the Controller shall publish such application as soon as possible. Once such a request is made, the patent office has to publish the application ordinarily within one month from the date of the request for publication. The applicant may request the controller for the early publication of the patent application before the lapse of 18 months. Such a request has to be made on Form-9- a request for early publication.

Request for Examination:
The Patents Act, 1970 provides for examination of patent application only on filing of a request for examination by the applicant or any other interested person [section 11 B]. This request can be filed on Form-18 with the prescribed fee at any time within 48 months from the date of priority or from the date of filing of the application, whichever is earlier. The patent application is referred to the examiner strictly in order of the requests filed. The examiner to whom the application is referred for examination has to submit his report to the Controller ordinarily within a period of one month’ from such reference but not exceeding three months from such reference [Rule 24B (2)].

Allocation of Application to the examiner for examination:
Once the request for examination is received and. the application has been published, the Controller shall refer the particular application to an examiner for conducting examination and search in accordance with sections 12 and 13 of the Patents Act, 1970. Before such a reference, the controller has to take the following points into consideration. In order of filing of request: Reference of the patent application shall be strictly in accordance with the sequential order of filing of the request for examination.

Examination of Patent Application: Regulatory Regime:
The examination of a patent application is conducted in accordance with the provisions of section 121 of the Patents Act, 1970. After the patent application is filed and subsequent to the filing of the request for examination as well as the publication of the same, the Controller shall refer the application and the specification and other documents related thereto to an examiner for making a report to him in accordance with the provisions of the Act and the Rules made thereunder.

Question 3.
What do you mean by examination of a patent application and discuss the different types of examination of a patent application?
Answer:
Formal examination: The patent examination can broadly be classified in two distinct forms, the formality examination, and the substantive examination.
The following steps are involved in the formal examination of patent applications:
• To check whether the application, specification, and other related documents are filed in duplicate in prescribed forms or not.

• To check whether the applicant is entitled to apply for a patent under section 6 of the Act.

• To check the jurisdiction of the applicant as specified under Rule 4(1 )(i) of the Patents

• Rules to decide the Appropriate Office for processing of the patent application. Jurisdiction is normally decided on the normal residential or domiciled address or place of business of the applicant or of the First Mentioned Applicant, in case of joint applicants or the place from where the invention actually originated

• To check the jurisdiction of the applicant who has no place of business or domicile in India. The address for service in India, as given by the applicant, is to be taken into consideration for deciding the Appropriate Office.

• To check whether the address for service has been provided in the application. If not, the Controller has no obligation to proceed further (Controller may take Suo moto decision in the matter) (Rule 5)

• To check whether any request has been made for the post-dating of the provisional specification. Postdating is allowed for a maximum period of 6 months (Sec-17(1)).

• To check whether the complete specification is filed within 12 months from the date of filing of provisional specification as specified in section 9(1) of the Act. The 12-month period for filing the complete specification after the provisional specification is not extendable.

• To check whether the complete specification is filed within 12 months from the earliest provisional specification when the same applicant has filed more than one provisional specification in respect of inventions which are cognate or of which one is a modification of the another and the whole of such inventions are such as to constitute a single invention(Sec -9(2)).

• To check whether the complete specification is filed within 12 months from the earlier complete specification filed which was treated as provisional specification under the provisions of section 9 (3) of the Act.

• It is to be noted that there is no provision for filing provisional specification or making a request to convert the complete specification to provisional specification in respect of the applications filed under convention and national phase entry via the PCT system.

• To check whether a Power of Attorney or a General Power of Attorney in original has been filed and whether the patent agent is authorized to practice before the patent office on behalf of the applicant(s). A self-attested photocopy of a General Power of Attorney is also admissible provided, an indication to the earlier patent application with which the original GPA is attached has been submitted.

• To check whether Declaration as to Inventorship (Form -5) has been filed along with the specification filed after filing provisional specification or along with the complete specification filed under convention application or along with the complete specification filed as PCTNP application under PCT route, as the case may be.

• To check whether Proof of Right to make an application has been filed as specified in Section 7(2) of the Patents Act along with the application (even at the time of filing the provisional application) except in the cases where the inventor(s) is(are) applicant(s) by himself (themselves).

• To check whether Form – 3 has been filed along with the patent application or within a period as specified under section 8 of the Patents Act.

• To check whether the application has been published under the provisions of Section 11A If the application is published before the period of 18 months from the date of filing the application, a check has to be made whether the request in Form – 9 has been filed for early publication, along with the requisite fee and, whether the application has been published after taking Form – 9 on record.

• To make cross-reference(s), if any, on the file covers of co-pending applications (cognate type, divisional, and parent applications) The related applications shall be sent together physically to examiners.

• A check is to be made whether the request for examination (Form-18) has been filed along with the requisite fee and by whom it was filed. If form 18 has been filed by a person other than the applicant it is to be examined whether that person is the ‘person interested’ as defined in Section 2(1 )(t) of the Patents Act.

• It also needs to be checked as to how many priorities are claimed and whether the requisite fee has been paid or not.

Timelines of filing documents and RQs, Forms and fees, right to file, priority rights, etc. The timeline as provided in the Act and Rules has been suitably incorporated in Annexure-I.

Substantive Examination:
The examiners to whom the application is referred to under section 12 conducts an examination of the patent application together with the complete specification and the other documents related therewith for making a report in respect of matters as mentioned in section 12(1 )[(a) to(d)] to the Controller. The examiner ascertains whether any lawful ground of objections exists to the grant of a patent under the statute.

Question 4.
What are single inventive concepts?
Answer:
Single Inventive Concept: Section 10(5) mandates that the claim/ claims of the complete specification shall relate to a single invention, or to a group of inventions linked so as to form a single inventive concept. The Manual Of Patent Office Practice and Procedure, of the year 2016 allows that there may be more than one independent claim in a single application if the claims fall under a single inventive concept. In the Manual, it has been advised “While there is no restriction as to the number of claims, including independent claims, it is advisable to limit the number of claims, as well as the number of independent claims in a single application so that the claims are linked so as to form a single inventive concept. If claims relate to a plurality of distinct inventions, it may be objected on grounds of lack of unity of invention”. The single common technical relationship which is inventive is called the “special technical feature”. This determination should be done on the content of the claims supported by the description in the light of the prior art.

Unity of invention is present only when there is a “technical relationship” among the claimed inventions involving one or more of the same or corresponding “special technical features.” The expression “special technical features” means those technical features that define a contribution which each of the claimed inventions, considered as a whole, makes over the prior art. The determination of whether a group of inventions is so linked as to form a single inventive concept is made without regard to whether the inventions are claimed in separate claims or as alternatives within a single claim.

  • Lack of unity may be evident in an application in the following ways:
  • ‘A priori’, i.e., before consideration of prior art, if the claims falling in different groups do not share the same or corresponding technical feature.
  • ‘A posteriori’, i.e., after a search of the prior art, if the shared technical feature fails to make an inventive contribution over the prior art.

Lack of unity of invention may be directly evident “a priori,” that is, before considering the claims in relation to any prior art, or may only become apparent “a posteriori,” that is, after taking the prior art into consideration. Space to write important points for revision

Question 5.
Discuss the re-issue and re-examination.
Answer:
Re-Issue and Re-Examination: After the grant of a patent, every patentee has to maintain the patent by paying a renewal fee every year as prescribed in schedule I.
For the first two years, there is no renewal fee. The renewal fee is payable from 3rd year onwards. In case the renewal fee is not paid the patent will be ceased. To keep a patent in force renewal fees are payable at the expiration of the second year from the date of the patent or of any succeeding year. In other words, the renewal fee has to be every year up to the completion of 20 years. Renewal fees can be paid beyond the due date within a period of 6 prescribed fees. If a patent is granted later than two years from the date of filing of the application, the fees which have become due in the meantime may be made within a period of 3 months from the date of recording the patent in the register. This time is also extendable by 6 months as described earlier.

The patentee has the choice to pay the renewal fees every year or he can pay in lump sum as well. Further, a request for restoration of patent can be filed within 18 months from the date of cessation of patent along with the prescribed fee. After receipt of the request, the matter is notified in the official journal for further processing of the request.

CS Professional Intellectual Property Rights Laws and Practices Notes

Corporate Governance for Insurance Companies – Insurance Law and Practice Important Questions

Corporate Governance for Insurance Companies – Insurance Law and Practice Important Questions

Question 1.
What is the role of actuary in life insurance companies?
Answer:
Actuarial profession in the world is about 150 years old. The traditional field of actuary was life insurance but actuaries gradually entered into wide field such as pension, general insurance, health insurance and investment. While the main function of actuaries in life insurance remains of the same viz., assessment of an valuation of mortality risk, the other aspects viz., risk selection, method of guarding agent anti-selection has became a subject of heated debate amongst life insurance actuaries in developed economies.

What lies at the centre of this discussion is the vast advances in medical sciences. This issue of insurance selection or rather insurance denial hand on generic data becomes even more sensitive in health and disability insurance.

Question 2.
Explain the concept of ‘treating customers fairly with respect to policy servicing in insurance business.
Answer:

  • Policy servicing is an significant parameter to judge the insurance company’s philosophy with respect to maintaining customer relationship in a long run.
  • Policy servicing refers to the response given by the insurance company to any communication received from its policyholders.
  • The Treating Customers Fairly (TCF) principle aims to raise standards in the way financial institutions cry on their business by introducing changes that will benefit consumers and increase their confidence in the financial services industry.
  • This is a customer-centric initiative aimed at improving the image and reputation of financial institutions by recognising the customers as one of the key stakeholders carefully and giving them the deserved treatment.

Question 3.
What is the role of actuary in life insurance companies?
Answer:
Actuarial profession in the world is about 150 years old. The traditional field of actuary was life insurance but actuaries gradually entered into wide field such as pension, general insurance, health insurance and investment.

While the main function of actuaries in life insurance remains of the same viz., assessment of an valuation of mortality risk, the other aspects viz., risk selection, method of guarding agent anti-selection has become a subject of heated debate amongst life insurance actuaries in developed economies.

What lies at the centre of this discussion is the vast advances in medical sciences. This issue of insurance selection or rather insurance denial hand on generic data becomes even more sensitive in health and disability insurance.

Question 4.
Explain the concept of ‘treating customers fairly with respect to policy servicing in insurance business.
Answer:

  • Policy servicing is an significant parameter to judge the insurance company’s philosophy with respect to maintaining customer relationships in a long run.
  • Policy servicing refers to the response given by the insurance company to any communication received from its policyholders.
  • The Treating Customers Fairly (TCF) principle aims to raise standards in the way financial institutions cry on their business by introducing changes that will benefit consumers and increase their confidence in the financial services industry.
  • This is a customer-centric initiative aimed at improving the image and reputation of financial institutions by recognising the customers as one of the key stakeholders carefully and giving them the deserved treatment.
  • This assumes most importance in the financial services industry keeping in mind that the customers park their hard-earned money with them and depend on them based on the expected level of servicing.
  • Likewise, a small dissatisfaction could lead to an irreparable damage to the institutions as well.
  • Financial Services Authority (‘FSA’), UK, has introduced this as a Code for compliance by the financial institutions.

Specifically, TCF aims to:
1. Help Customers fully understand the features, benefits, risks and costs of the financial products they buy.

2. Minimise the sale of unsuitable products by encouraging best practices before, during and after a sale.
In fact, Treating Customers Fairly is an integral part of Principle 6 of “Principles of Business” published by FSA, which states that a firm must pay due regard to the interests of the customers and treat them fairly.

The retail regulatory agenda of FSA aims to achieve an effective and efficient market by treating the customers fairly. This is aimed to be achieved through a focus on capable and confident consumers, providing simple and understandable information to consumers, well managed and adequately capitalised firms which treat the customers fairly, and risk-based and proportionate regulation.

Question 5.
What are the disclosure requirements that have been prescribed by IRDAI for insurance companies under the corporate governance guidelines?
Answer:
The disclosure requirements specified under IRDAI along with Annual Financial Statements for Insurance Company under corporate governance guidelines are under:

  • Quantitative and qualitative information on the insurer’s financial and operating ratios- namely incurred claim, commission and expenses ratios.
  • Actual solvency Margin details vis-a-vis the required margin.
  • Insurers engaged in life insurance business shall disclose persistency ratio of policies sold by them.
  • Policy lapse ratio for life insurers.
  • Financial performance including growth and current financial position of the insurer.
  • Description of risk management architecture.
  • Details of number of claims initiated, disposed of and pending with details of duration.
  • All pecuniary relationships or transactions of the non-executive directors vis-a-vis the insurer.
  • Elements of remuneration package(including incentives) of MD & CEO and all other directors and Key Management Persons.
  • Payments made to group entities from the Policyholders Funds.
  • Any other matters, which have material impact on the insurer’s financial position.

Where finalization of annual accounts extends beyond 90 days from the end of the Financial Year, the status on disclosure in the financial statements required under this clause may be made within 15 days of adoption of annual accounts by the Board of Directors of the Insurers.

Question 6.
Outline the areas on which the Statutory Auditor is required to express his opinion during Certification of Financial Statements of Insurance Companies.
Answer:
The Statutory Auditor of an insurance company is required to express his opinion on:
1.

  • Whether the balance sheet gives a true and fair view of the insurer’s affairs as the end of the financial year/period.
  • Whether the revenue account gives a true and fair view of surplus or the deficit for the Financial year/period.
  • Whether the Profit and Loss Account gives a true and fair view of the profit or loss for the financial year/period.
  • Whether the receipts and payments, account gives a true and fair view of the receipts and payments for the financial year/period.

2. The financial statements are prepared in accordance with the requirements of the Insurance Act 1938, the Insurance Regulatory and Development Authority Act,1999 and the Companies Act, 2013, to the extent applicable and in the manner son required.

3. Investments have been valued in accordance with the provisions of the act and regulations.

4. The accounting policies are appropriate and are in compliance with the applicable Accounting Standards and the Accounting Principles.

5. Certify the management report and that there is no apparent mistake or material inconsistencies with the financial statement.

6. He has to certify that he has verified the cash balances and securities relating to the insurer’s loans reversions and life interest and investments.

7. Certify that the insurer has complied with the terms and conditions of the registration stipulated by the Authority.

A certificate signed by the Auditors (which is in addition to any other certificate or report which is required by law to be given with respect to the balance sheet) certifying that:
1. They have verified the cash balances and the securities relating to the insurer’s loans, reversion and life interests (in the case of life insurers) and investments;

2. The extent, if any, to which they have verified the investments and transactions relating to any trusts undertaken by the insurer as trustee; and

3. No part of the assets of the policyholders’ funds has been directly or indirectly applied in contravention of the provisions of the Insurance Act, 1938 (4 of 1938) relating to the application and investments of the policyholders’ funds.”

Question 7.
Write short notes on:
(a) Duties and obligations of appointed actuary
(b) Duties and responsibilities of a surveyor and loss assessor
(c) Disclosure norms in websites of insurance companies
Answer:
(a) Duties and obligations of Appointed Actuary:
In particular and without prejudice to the generality of the foregoing matters, and in the interests of the insurance industry and the policyholders, the duties and obligations of an appointed actuary of an insurer shall include:

  • rendering actuarial advice to the management of the insurer, in particular in the areas of product design and pricing, insurance contract wording, investments and reinsurance;
  • ensuring the solvency of the insurer at all times;
  • complying with the provisions of the Section 64V of the Act in regard to certification of the assets and liabilities that have been valued in the manner required under the said section;
  • complying with the provisions of the Section 64 VA of the Act in regard to maintenance of required solvency margin in the manner required under the said section;

drawing the attention of management of the insurer, to any matter on which he or she thinks that action is required to be taken by the insurer to avoid-
any contravention of the Act; or
prejudice to the interests of policyholders;

complying with the Authority’s directions from time to time;

in the case of the insurer carrying on life insurance business-
to certify the actuarial report and abstract and other returns as required under Section 13 of the Act;
to comply with the provisions of Section 21 of the Act in regard to further information required by the Authority;
to comply with the provisions of Section 40-B of the act in regard to the bases of premium;
to ensure that all the requisite records have been made available to him or her for the purpose of conducting actuarial valuation of liability and assets of the insurer;
to ensure that the premium rates of the insurance products are fair.

(b) Duties and Responsibilities of a Surveyor and Loss Assessor:
A surveyor and loss assessor shall, for a major part of the working time, investigate, manage, quantify, validate and deal with losses (whether insured or not) arising from any contingency, and report thereon, and carry out the work with competence, objectivity and professional integrity by strictly adhering to the code of conduct expected of such surveyor and loss assessor.

The following, shall, inter alia, by the duties and responsibilities of a surveyor and loss assessor:

  • declaring whether he has any interest in the subject matter in question or whether it pertains to any of his relatives, business partners or through material shareholding;
  • maintaining confidentiality and neutrality without jeopardising the liability of the insurer and claim of the insured;
  • conducting inspection and re-inspection of the property in question suffering a loss;
  • examining, inquiring, investigating, verifying and checking upon the causes and the circumstances of the loss in question including extent of loss, nature of ownership and insurable interest;
  • conducting spot and final surveys, as and when necessary and comment upon franchise, excess/under insurance and any other related matter;
  • estimating, measuring and determining the quantum and description of the subject under loss;
  • advising the insurer and the insured about loss minimisation, loss control, security and safety measures, wherever appropriate, to avoid further losses;
  • commenting on the admissibility of the loss as also observance of warranty conditions under the policy contract;
  • surveying and assessing the loss on behalf of insurer or insured;
  • assessing liability under the contract of insurance;
  • pointing out discrepancy, if any, in the policy wordings;
  • satisfying queries of the insured/insurer and of persons connected thereto in respect of the claim/loss;

(c) Disclosure Norms in Websites of Insurance Companies:
IRDA requires insurance companies to publish the following in their websites periodically.

  • Financial statements, viz., Revenue Account, Profit & Loss Account, Balance Sheet, Premium, Commission, Operating Expenses, Benefits paid
  • Share Capital and shareholding pattern
  • Investments
  • Fixed Assets
  • Analytical ratios
  • Valuation of net liabilities and main parameters of valuation
  • Geographical distribution of business
  • Related party transactions
  • Board of Directors and Key persons
  • Solvency margins
  • Claims data
  • Grievances data.

Question 8.
What are the corporate governance guidelines issued by IRDA for insurance companies?
Answer:
Corporate Governance:
Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. Corporate Governance involves regulatory and market mechanisms and the roles and relationships between a company’s management, its board, its shareholders and other stakeholders and the goals for which the Company is governed.

Principles of Corporate Governance:
(a) Rights and equitable treatment of shareholders:
Companies must encourage values and systems that respect rights of shareholders and help shareholders exercise those rights. Communicating the rights and encouraging shareholders to participate in meetings is very important.

(b) Interests of other stakeholders:
Other stakeholders include Customers, Employers, Investors, Creditors, Suppliers, Regulators, Communities, Policymakers etc. The Governance must ensure that the Company grows after taking care of the interests of the stakeholders.

(c) Roles and responsibilities of the Board:
The Board needs to be segregated from the management and the roles and responsibilities of the members of the management team including the CEO must be clearly defined. Management must be required to be accountable to the Board who must monitor their performance.

(d) Disclosure and transparency:
This is a cardinal principle of Corporate governance and includes public disclosures as appropriate, internal communications, other external communications etc. Such a disclosure mechanism must enable all stakeholders to take an informed decision.

Question 9.
Explain the desired outcomes expected upon adoption of TCF.
Answer:
Desired Outcomes expected upon adoption of TCF:
The firms which have adopted TCF are expected to deliver the following outcomes:
Outcome 1:
Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture (Right Culture).

Outcome 2:
Product and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly (Right Target).

Outcome 3:
Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale (Right Information).

Outcome 4:
Where consumers receive advice, the advice is suitable and takes account of their circumstances (Right Advice).

Outcome 5:
Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect (Right Guidance).

Outcome 6:
Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch providers, submit a claim or make a complaint (Right After Sales Service).

Question 10.
Protection of Policyholders is a very important aspect in the insurance business. Explain the provisions for protection of the interest of policyholders provided by IRDA.
Answer:
General Measures providing for Policyholders’ Protection:
1. The requirements of disclosure of “material information” regarding a proposal or policy apply, under these regulations, both to the insurer and the insured.

2. The policyholder shall assist the insurer, if the latter so requires, in the prosecution of a proceeding or in the matter of recovery of claims which the insurer has against third parties.

3. The policyholder shall furnish all information that is sought from him by the insurer and also any other information which the insurer considers as having a bearing on the risk to enable the latter to assess properly the risk sought to be covered by a policy.

4. Any breaches of the obligations cast on an insurer or insurance agent or insurance intermediary in terms of these regulations may enable the Authority to initiate action against each or all of them, jointly or severally, under the Act and/or the Insurance Regulatory and Development Authority Act, 1999.

CS Professional Insurance Law and Practice Notes

Duty Drawback – Advanced Tax Laws and Practice Important Questions

Duty Drawback – Advanced Tax Laws and Practice Important Questions

Question 1.
Explain the provisions for claiming duty drawback and also ascertain whether the exporter is entitled to duty drawback in the following independent cases and if yes, state the amount of such duty drawback:

  1. FOB value of goods exported is ₹ 5,50,000. The rate of duty drawback on such export of goods is 1.75%.
  2. FOB value of 2,000 kgs. of goods exported is ₹ 2,00,000. The rate of duty drawback on such export is ₹ 30 per kg. The market price of goods is ₹ 50,000 in the wholesale market.

Answer:
(1) As per Rule 8(1) of the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995, no amount of drawback shall be allowed if the rate of drawback is less than 1% of the FOB value, except where the amount of drawback per shipment exceeds ₹ 500/Further, as per section 76(l)(c) of the Customs Act, 1962 drawback is not allowed where the drawback due in respect of any goods is less than ₹ 50/-

In the given case, since the rate of duty drawback is not less than 1% the drawback due works out ₹ 9625 (1.7596 of FOB value of ₹ 5,50,000) which is more than ₹ 50. Duty drawback of ₹ 9625 shall be allowed.

(2) Section 76(l)(b) of the Customs Act, 1962 inter alia provides that no drawback shall be allowed in respect of any goods, the market price of which is less than the amount of drawback due thereon. In this case, the market price of the goods is ₹ 50,000 which is less than the amount of duty drawback, i.e. 2,000 kgs x ₹ 30 = ₹ 60,000. Hence, no drawback shall be allowed.

Question 2.
Calculate the amount of duty drawback allowable under the Customs Act, 1962 in the following independent cases:

(1) Jaggi Mehta imported a car from the U.K. for his personal use and paid ₹ 4,50,000 as import duty on the car. However, the car was being re-exported immediately without bringing it into use by Mr. Mehta.

(2) Meenakshi imported a music player from Dubai and paid ₹ 12,000 as import duty. She used it for four months and thereafter re-exported the same after four months.

Answer:
Computation of duty drawback is as follows:-
(1) Drawback at 98% [₹ 4,41,000]
As per section 74 of the customs Act, 1962 when any identifiable imported goods are re-exported, 98% of the import duty is re-paid as drawback provided-

  • the goods are identified to the satisfaction of the Assistant/ Deputy Commissioner of Customs as the goods which were imported, and
  • the same are entered for export within two years from the date of payment of the import duty.

Thus, Jaggi Mehta can claim a duty drawback of ₹ 4,41,000 (9896 of ₹ 4,50,000) on the presumption that aforesaid conditions are fulfilled.

(2) As per section 74 of the Customs Act, 1962, in respect of a motor car or goods imported by a person for his personal and private use, the drawback of duty = Import duty paid in respect of such motor car or goods as reduced by 496, 396, 2.596 and 296 for use for each quarter or part thereof duty the period of the first year, second year, third year and fourth year respectively.

Since goods have been used for 4 months i.e. 2 quarters, hence, Meenakshi can claim duty drawback = 100% – 4% x 2 quarters = 92% of ₹ 12,000 = ₹ 11,040. It is assumed that all other conditions are fulfilled.

Question 3.
Calculate the amount of drawback available under section 74 of the Customs Act, 1962 in the following 3 separate cases: –

  1. X imported computers for office use and paid ₹ 5,00,000 as import duty. The computers are re-exported after 13 months.
  2. Y imported goods for his personal use and paid ₹ 1,00,000 as import duty. Such goods are re-exported after 3 months 10 days.
  3.  Z imported wearing apparel and paid ₹ 20,000 as import duty. These are re-exported after 6 months.

Answer:
As per provisions of section 74 of the Customs Act, 1962: –
1. Since the computers have been taken into use and then re-exported, duty drawback shall be allowed as per section 74(2). 65% of the import duty paid will be allowed as a drawback.
Hence, the amount of drawback = ₹ 5,00,000 X 65% = ₹ 3,25,000.

2. In respect of goods imported by a person for his personal and private use, the drawback of duty shall be equal to the import duty paid in respect of such motor car or goods as reduced by 4%, 3%, 2.5%, and 2% for use for each quarter or part thereof during the period of the first year, the second year, third year and fourth year respectively. Hence, in given case, it shall be 92% of ₹ 1,00,000 = ₹ 92,000

3. No Duty Drawback shall be allowed on wearing apparel that has been taken into use and re-exported.

Question 4.
Write a short note on prohibition or regulation of duty drawback with reference to the provisions of the Customs Act, 1962.
Answer:
Prohibition and regulation of drawback in certain cases (Section 76)
No drawback shall be allowed in respect of any goods,

  • the market price of which is less than the amount of drawback due thereon;
  • where the amount of drawback is less than ₹ 50. (section 76(1) overrides other provisions of the Act}

If the Central Government is of the opinion that goods of any specified description in respect of which drawback is claimed, are likely to be smuggled back into India, it may, by notification in the official gazette, direct that,

  • drawback shall not be allowed in respect of such goods; or
  • maybe allowed subject to such restrictions and conditions as may be prescribed.

Question 5.
Sun & Moon Ltd. sent a consignment of manufactured goods by a ship from Mumbai to London. The company has paid export duty and j GST on the components used in manufacture. A duty drawback rate has ( been fixed for these goods. The ship carrying the consignment runs into j trouble and sinks in the Indian territorial waters. The Customs Department refused to grant drawbacks for the reason that the goods did not reach their destination. Discuss whether the refusal of the Customs Department is valid in law, by referring to decided case law if any.
Answer:
As per Rule 3 of the Customs and Central Excise Duties Drawback Rules, 2017, the drawback may be allowed on the export of goods at such amount, or at such rates, as may be determined by the Central Government. Thus, the answer to the issue involved would depend upon whether any export of goods has taken place. Rule 2(c) of the said rules inter alia defines “export” to mean taking out of India to a place outside India. Whereas, section 2(27) of the Customs Act defines “India” to include the territorial waters of India.

The combined reading of the aforesaid provisions reveals that to be eligible to claim drawback, there has to be export of goods, and the word export has been defined as taking the goods from India to a place outside India. India has been defined so as to include Indian Territorial Waters. In short, the export is said to have taken place only of goods cross Indian territorial waters.

In the present case, the consignment sent by Sun and Moon Ltd. from Mumbai to London ran into trouble and sunk in Indian Territorial Waters. Thus, it is clear that export of goods have not been taken in the instant case. Accordingly, the duty drawback will not be admissible and denial thereof by the Customs Authorities is justified in law.

The present issue is covered by the judgment of the Hon’ble Supreme Court in the matter of Union of India v. Rajindra Dyeing & Printing Mills Ltd. 2005 (180) ELT 433 (SC).

Question 6.
Ratan exported 2,000 pairs of leather shoes @ ₹ 750 per pair. AH, industry rate of duty drawback is fixed on an average basis i.e. @ 11% of F.O.B. subject to a maximum of ₹ 80 per pair. The exporter found that actual duty paid on input was ₹ 1,95,000. He has approached you as a consultant to apply under Rule 7 of the drawback rules for fixation of ‘Special Brand Rate’. Advise him suitably.
Answer:
Drawback amount = ₹ 1,65,000 (i.e. 2,000 × 750 × 11%) or ₹ 1,60,000 (i.e. ₹ 80 × 2,000) whichever is less.
Therefore, the duty drawback allowed ₹ 1,60,000.

  • All industry duty drawback rate = 82.05% [(1,60,000/1,95,000) × 100%]
  • The exporter is not eligible to apply for the Special Brand rate.
  • Therefore, exporter is eligible for claiming All Industry Duty Drawback.

Note: Special brand rate of duty is applicable only when all industry rates do not cover 80% of the duties paid by the exporter.

Duty Drawback Notes

  • Drawback allowable on re-export of duty paid goods (Section 74)

a. Goods should be re-exported without Value addition.
b. For goods not taken into use, Drawback shall be 98% of import duty paid.
c. All goods are eligible for this drawback.
d. Goods must be exported within 2 years from the date of payment I of duty.
e. There is no requirement to bring the export proceeds in convert¬ible foreign exchange.
f. For business goods taken into use, the Central Government has notified the drawback rates as follows: –

Period between date of clearance for home consumption and the date when goods are place under customs control for export % of import duty to be paid as Drawback
Not more than 3 months 95%
More than 3 months – but not more than 6 months 85%
6 – 9 months 75%
9-12 months 70%
12-15 months 65%
15-18 months 60%
More than 18 months Nil

g. For goods for personal use, taken into use and then exported: Drawback of duty = Import duty paid in respect of such goods as reduced by 4%, 3%, 2.5%, and 2% for use for each quarter or part thereof duty the period of the first year, second year, third year and fourth year respectively.

h. Goods on which no duty drawback is allowed if they are re-exported after being put to use in India: Wearing Apparel, Tea Chests, Exposed cinematograph film passed by the Board of Film Censors in India, Unexposed photographic films/Papers & plates/X-rav films.

The drawback on materials used in the manufacture of exported goods (Section 75)
a. Duty drawback is available only in respect of notified goods.
b. Drawback is allowed as per All Industry Rate notified by Drawback Directorate.
c. There is no time limit for exporting the goods.
d. There should be no negative value addition i.e. FOB of Exports must be greater than FOB of imported materials. Further, minimum value addition criteria must be achieved, if specified.
e. Export proceeds are to be brought in India in convertible for¬eign exchange within the time limit specified in FEMA, then only the drawback granted shall be recovered.
f. Maximum amount of drawback shall be 1 /3rd of the market price of goods.
g. Drawback is not permissible if the market price of goods is less than the amount of drawback.
h. Drawback is not allowed if the amount of drawback is less than ? 50.
Concept of Brand Rate and Special Brand rate in relation to All industry rates of drawback.

CS Professional Advance Tax Law Notes

Foreign Trade Policy To The Extent Relevant For Indirect Tax Law – Advanced Tax Laws and Practice Important Questions

Foreign Trade Policy To The Extent Relevant For Indirect Tax Law – Advanced Tax Laws and Practice Important Questions

Question 1.
ABC Ltd., an exporter whose export turnover for the year ended 31st March 2019 is ₹ 20.00 Lakhs, approaches you to discuss the conditions to be complied to become a Status Holder and to know about the privileges available to Status Holder if any Advise the exporter suitably.
Answer:
Status holders
With regard to the conditions to be complied to become a status holder, M/s ABC Ltd. is advised as below:

  • Status recognition will depend on export performance.
  • An applicant shall be categorized as the status holder on achieving export performance during the current and previous three financial years (for Gems & Jewellery Sector the performance during the current and previous two financial years)
  • The export performance will be counted on the basis of FOB of export earning in freely convertible foreign currencies
  • For granting status, export performance is necessary for at least two out of four years.

Export Performance shall be as per the table below:

Status Category Export Performance FOB/FOR (as converted) Value (in US$ million)
One Star Export House 3
Two-star Export House 25
Three-star Export House 100
Four Star Export House 500
Five-star Export House 2000

Grant of Double Weightage

(1) The exports by IEC holders under the following categories shall be granted double weightage for calculation of export performance for grant of status.

  • Micro, Small & Medium Enterprises (MSME) as defined in Micro, Small & Medium Enterprises Development (MSMED) Act, 2006.
  • Manufacturing units having ISO/BIS.
  • Units located in the North Eastern States including Sikkim and Jammu & Kashmir.
  • Units located in Agri Export Zones.

(2) Double Weightage shall be available for grant of the One Star Export Flouse Status category only.
(3) A shipment can get double weightage only once in any one of the above categories.

Other conditions for grant of status:

  • Export performance of one IEC holder shall not be permitted to be transferred to another IEC holder. Hence, calculation of exports performance based on disclaimer shall not be allowed.
  • Exports made on a re-export basis shall not be counted for recognition.
  • Export of items under Authorisation, including SCOMET items, would be included for calculation of export performance.
    Accordingly, M/s. ABC Ltd. is advised to go through the above-stated conditions and determine its eligibility to become a status holder.

Foreign Trade Policy To The Extent Relevant For Indirect Tax Law Notes

  • Focus areas in New Foreign Trade Policy
  • Coverage of the Policy
  • Various Export Promotion Schemes
  • Exemption and Remission schemes (Inputs)

1. Advance Authorisation scheme
2. Duty-Free Import Authorisation

  • Export Promotion Capital Goods (EPCG) scheme

1. Pre-Export EPCG
2. Post-Export EPCG
3. EPCG scheme for capital goods purchased in India

  • Status Holder’s Scheme
  • Reward/Incentive schemes

1. Merchandise Exports from India Scheme (MEIS)
2. Service Exports from India Scheme (SEIS)

CS Professional Advance Tax Law Notes

Taxation Of Firms Including Llp And Provisions Of Alternate Minimum Tax U/S 115jc Of Income Tax Act – Advanced Tax Laws and Practice Important Questions

Taxation Of Firms Including Llp And Provisions Of Alternate Minimum Tax U/S 115jc Of Income Tax Act – Advanced Tax Laws and Practice Important Questions

Question 1.
JC & Co., a partnership firm, constituted by two partners Arun and Barun, reports a net profit of ₹ 10,00,000 before deduction of the following items for the previous year ended 31st March 2021:
(1) Salary of ₹ 30,000 each paid per month to both the working partners of the firm, which is authorized by the deed of partnership.
(2) Depreciation on fixed assets as per the Income-tax Act, 1961 of ₹ 2,50,000.
(3) Interest on capital to be allowed @15% per annum as authorized by the deed of partnership. The amount of capital as contributed by each of the partners is ₹ 5,00,000.

You are required to compute:

  • Book profits of the firm;
  • The allowable amount of salary to the working partners for the assessment year 2021-22, as per the provisions of Income-tax Act, 1961.

Adduce brief reasons/notes for your calculations.
Answer:
(1) As per Explanation 3 to section 40( b) of the Income Tax Act, 1961 /‘Book Profits” shall mean the net profit as per the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to the partners of the firm, if the same has been already deducted while computing the net profit. In the present case, the net profit given is before deduction of depreciation on fixed assets, interest on capital of partners, and salary paid to the working partners.

Therefore, the book profits shall be computed as under:

Particulars Amount(₹) Amount(₹)
Net Profit before deduction of depreciation, remuneration to partners, and interest on partners’ capital 10,00,000
Less: Depreciation u/s 32 of Income Tax Act 2,50,000
Less: Interest at 12% p.a. {Being maximum allowable as per section 40( b) of Income Tax Act} 1,20,000 (3,70,000)
Therefore, Book Profits 6,30,000

Note: Salary paid to work partners have not been added for computation of Book Profits in terms of Explanation III of section 40(b) of the Act as it was initially not deducted (debited) while computation of net profit reported by JC & Company.

(2) Salary actually paid to the working partners not charged is ₹ 30,000 × 2 × 12 = ₹ 7,20,000.
As per provisions of section 40(b) of the Income Tax Act, the salary paid to work partners is allowed subject to the following limits:

On first ₹ 3,00,000 of book profits or in case of loss ₹ 1,50,000 or 90% of book profits, whichever is higher.
On the balance of book profits 60% of balance book profits

The maximum allowable salary to the working partners for the Assessment Year 2021-22, in this case, would be:

Particulars Amount(₹)
On the first × 3,00,000 of Book Profits (₹ 1,50,000 or 90% of × 3,00,000, whichever is higher) 2,70,000
On the balance of book profits {60% of (₹ 6,30,000 – 3,00,000)} = 60% of ₹ 3,30,000 1,98,000
Maximum Allowable Partner’s Remuneration 4,68,000

Since, the above amount is lower than the actual remuneration paid, the allowable working partners’ salary for the Assessment Year 2021-22 as per provisions of section 40(b) of Income Tax Act, 1961 is ₹ 4,68,000.

Question 2.
Work out the taxable income and the tax payable thereon for A.Y. 2021-22 of a partnership firm engaged in retail trade business from the following particulars:

  1. Net profit of ₹ 3,65,000 arrived at after debit of interest on capital of partners of ₹ 1,80,000 and salaries paid to the working partners of ₹ 4,80,000.
  2. The total capital of the partners on which interest was paid as debited in the profit and loss account was ₹ 10,00,000.
  3. Both the payments of interest on capital and the salary to the working partners have been authorized by the deed.

Answer:
Computation of Taxable Income and tax liability of partnership firm for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)

Particulars Amount(₹) Amount(₹)
Net Profit as per Profit and Loss Account 3,65,000
Add: Interest on Capital (Disallowed in excess of 12% of Partner’s Capital: ₹ 1,80,000 – ₹ 1,20,000) 60,000
Add: Salaries to Partners 4,80,000 5,40,000
Book Profits 9,05,000
Admissible amount of Partner’s Remuneration
Lower of the following:
(a) Actual Remuneration debited towards Working Partners; or 4,80,000
(b) Ceiling limit as per section 40(b)
On Book Profits of first ₹ 3,00,000, at 90% : 2,70,000
On balance book profits’at 60% (₹ 6,05,000 × 60%): 3,63,000 6,33,000
Therefore, Allowable Remuneration (4,80,000)
Therefore, Total Income 4,25,000
Tax at 30% 1,27,50
Add: Health and Education Cess @ 4% 5,100
Total Tax payable 1,32,600

Question 3.
ABC & Co. Is a partnership firm consisting of four partners? The partnership deed provides for remuneration of 4,00,000 to partners and interest to partners at 12%. Profit for the year ended 31st March 2021 is 1,00,000 after arriving at the following adjustments:

Particulars Amount(₹)
Remuneration to partners 4,00,000
Interest to partners on capital account  12% 20,000
A municipal tax of house property 5,000
Rent received on house property 50,000

Compute the book profit and remuneration deductible under section 40(b) of the Income-tax Act, 1961.
Answer:
Computation of Book Profits and allowable remuneration for the firm for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)

Particulars Amount(₹) Amount(₹)
(a) Net Profit as per Profit and loss Account 1,00,000
b. Add: Municipal Tax of House Property 5,000
c. Less: Rent received from house property (50,000)
d. Add: Partners’ remuneration debited 4,00,000
e. Therefore, Book Profits 4,55,000
f. Allowable Remuneration
Lower of the following:
Actual Remuneration debited towards working partners 4,00,000
Maximum allowable 90Q6 of ₹ 3,00,000 – ₹ 2,70,000

Add: On Balance Book Profits at 60% (₹ 1,55,000 × 60%) – ? 93,000

3,63,000
Therefore, ALLOWABLE REMUNERATION 3,63,00

Question 4.
PQR, a partnership firm, has 3 partners namely Pankaj, Qureshi, and Robert. The firm has paid a salary of ₹ 1.5 lakh p.a. to each of its partners during the previous year 2020-21 and the same is authorized by Partnership Deed. The net profit of the firm as shown in the profit and loss account computed in the manner laid down in Chapter IV-D of Income Tax Act, 1961 is ₹ 6 lakh after providing for salary to the partners. Compute the amount of deduction of remuneration paid to partners assuming that Qureshi is a non-working partner.
Answer:
Computation of deduction of remuneration paid to partners for Assessment Year 2021-22 (Relevant to Previous Year 2020-21)

Particulars Amount(₹) Amount(₹)
Net Profit as per Profit and Loss Account 6,00,000
Add: Remuneration to partners (₹ 1,50,000 × 3) 4,50,000
Book Profits 10,50,000
Less: Remuneration allowable u/s 40(b)
Lower of the following:-
a. Actual Remuneration to working partners (Re-muneration paid to non-working partner is not allowed as deduction) ₹ 1,50,000 × 2 3,00,000
b. Maximum limit i.e. ₹ 3,00,000 × 90% + Balance Book Profits × 60% i.e. ₹ 2,70,000 + ₹ 4,50,000 7,20,000
Therefore, Allowable Remuneration 3,00,000
Therefore, Profits and Gains from Business or Profession/Total Income 7,50,000

Question 5.
An individual has a business income of ₹ 35,00,000 for the previous year 2020-21. He for the previous year 2019-20 was subject to Alternate Minimum Tax (AMT) because of claiming deduction under section 80-IE of Income Tax Act, 1961. He has an AMT credit of ₹ 5,00,000. Calculate the tax to be paid by him for the assessment year 2021-22. Also, work out the amount of balance of available AMT credit.
Answer: Computation of tax payable by the individual for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)

Particulars Amount(₹) Amount(₹)
1. Total Income as per provisions of the Act 35,00,000
2. Tax on above as per normal provisions:
On an income of ₹ 2,50,000
On ? 2,50,000 to ₹ 5,00,000, Tax @ 5% 12,500
On ? 5,00,000 to ₹ 10,00,000, Tax @ 20% 1,00,000
On income above ₹ 10,00,000, Tax @ 309o (₹ 25,00,000 × 30%) 7,50,000
Sub-Total 8,62,500
Add: Health & Education Cess @ 4% 34,500 8,97,000
3. Adjusted Total Income 35,00,000
4. Alternate Minimum Tax @ 18.5% of ₹ 35,00,000 6,47,500
Add: Health and Education Cess @ 4% 25,900 6,73,400
5. Therefore, Tax payable – higher of tax under steps 2 and 4 8,97,000

Question 6.
From the following information provided for the previous year 2020 21, compute the total income and tax liability considering provisions of , Alternate Minimum Tax assuming the assessee is an individual:

Particulars Amount(₹)
Net Profit as per Profit & Loss A/c 19,05,000
Depreciation as per Profit & Loss A/c 3,50,000
Depreciation as per Income Tax Rules 3,60,000
Inadmissible expenses 1,40,000
Deduction u/s 10AA (computed) 12,00,000
Deduction u/s 80-IA 35,000

Answer:
Computation of Total Income and Tax liability for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)

Particulars Amount(₹) Amount(₹)
Net Profit as per Profit and Loss Account 19,05,000
Add: Inadmissible Expenses 1,40,000
Add: Depreciation as per P&L Account 3,50,000
Less: Depreciation as per Income Tax Rules (3,60,000)
Total 20,35,000
Less: Deduction u/s 10AA of Income Tax Act (12,00,000)
Therefore, Profits and Gains from Business or Profession 8,35,000
Less: Deduction under section 80-IA of Income Tax Act (35,000)
Total Income 8,00,000
Tax liability
On ₹ 2,50,000
₹ 2,50,000 to ₹ 5,00,000, Tax @ 5% 12,500
On ₹ 5,00,000 to ₹ 10,00,000, Tax @ 20% (₹ 3,00,000 × 20%) 60,000
Sub-Total 72,500
Add: Health and Education Cess @ 4% 2,900
Total Tax 75,400
Adjusted Total Income
Total Income 8,00,000
Add: Deduction u/s 10AA 12,00,000
Add: Deduction u/s 80-IA 35,000
Therefore, Adjusted Total Income 20,35,000
Alternate Minimum Tax @ 18.5% of ₹ 20,35,000 3,76,475
Add: Health and Education Cess @ 4% 15,059 3,91,534
Therefore, Tax payable shall be higher than a tax as per normal provisions or AMT 3,91,534
Rounded off to nearest of ₹ 10 u/s 288B 3,91,530

Note:
Since AMT is payable, there shall be AMT Credit. It shall be to the extent of excess of AMT over normal tax liability i.e. ₹ 3,91,530 – 75,400 = ? 3,16,130.

Question 7.
Does XYZ LLP have an income of ₹ 72,00,000 under the head ‘profits and gains of business or profession’? One of its businesses is eligible for deduction @ 100% of profits under section 80-IB for the assessment year 2021-22. The profit from such business included in the business income is ₹ 58,00,000. Compute the tax payable by the LLP, assuming that it has no other income during the previous year 2020-21.
Answer:
Computation of tax payable by XYZ LLP for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)

Particulars Amount(₹) Amount(₹)
1. Total Income as per normal provisions of the Act
Profits and Gains from Business or Profession Gross Total Income 72,00,000
Less: Deduction under section 80-IB (58,00,000) 14,00,000
2. Tax on above at 30% 4,20,000
Add: Health and Education Cess @ 4% 16,800 4,36,800
3. Adjusted Total Income
Total Income as per provisions of the Act 14,00,000
Add Deduction under section 80-IB 58,00,000 72,00,000
4. Alternate Minimum Tax (AMT) @ 18.5% 13,32,000
Add: Health and Education Cess @ 4% 53,280 13,85,280
5. Tax liability, Higher of tax under steps 2 and 4 13,85,280

Note:
The LLP would be eligible for credit in 15 subsequent years to the extent of the difference between the AMT and Normal Tax i.e. ₹ 9,48,480 (₹ 13,85,280 s – ₹ 4,36,800), in the year in which the tax payable under regular provisions exceeds the AMT.

Question 8.
Mr. X, carrying on the business of operating a warehousing facility for the storage of sugar, has a total income of ₹ 80 lakhs. In computing the total income, he had claimed deduction under section 35AD to the tune of ₹ 70 lakhs on investment in building (on 1.4.2020) for operating the warehousing facility for storage of sugar. Compute his tax liability for A.Y. 2021-22. Show the calculations of Alternate Minimum Tax also.
Answer:
Computation of tax liability of Mr. X for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)

Particulars Amount(₹) Amount(₹)
1. Total Income as per normal provisions of the Act 80,00,000
2. Tax on above:
On ₹ 2,50,000
On ₹ 2,50,000 to ₹ 5,00,000, Tax @ 5% 12,500
On ₹ 5,00,000 to ₹ 10,00,000, Tax @ 20% 1,00,000
On income above ₹ 10,00,000, Tax @ 30% (₹ 70,00,000 × 30%) 21,00,000
Sub-Total 22,12,500
Add: Surcharge @ 10% 2,21,250
Sub-Total 24,33,750
Add: Health and Education Cess @ 4% 97,350 25,31,100
3. Adjusted Total Income
Total Income as per provisions of the Act 80,00,000
Add: Deduction claimed under section 35AD 70,00,000
Less: Depreciation under section 32 on building (₹ 70,00,000 × 10%) (7,00,000) 1,43,00,000
4. Alternate Minimum Tax @ 18.5% 26,45,500
Add: Surcharge @15% as ATI exceeds ₹ 1 crore 3,96,825
Sub-Total 30,42,325
Add: Health and Education Cess @ 4% 1,21,693 31,64,018
5. Therefore, Tax payable (Higher tax under step 2 and step 4) 31,64,018
Rounded off to nearest of ₹ 10 under section 288B 31,64,020

Note:
Mr. X would be eligible for AMT credit of the difference between the AMT and Normal Tax i.e. ₹ 6,32,920 (₹ 31,64,020 – ₹ 25,31,100). Such AMT credit can be carried forward for the subsequent 15 assessment years.

Author’s Note:
In all the above cases, computation of tax liability in the case of individuals is done as per normal slabs i.e. it is presumed that such individuals did not opt for provisions of alternate tax regime u/s 115BAC.

Question 9.
Explain the provisions of the Income-tax Act, 1961 relating to applicability of Alternative Minimum Tax (AMT), a tax credit for AMT, set off and carry forward of AMT.
Answer:
Applicability of Alternate Minimum Tax ‘AMT’ As per the provision of Section 115JC of the Income-tax Act, 1961, where the regular income-tax payable for a previous year by a person, other than a company, is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of that person for such previous year and he shall be liable to pay income-tax on such total income at the rate of @ 18.50% (+ applicable surcharge + health and education cess) on adjusted total income Thus, ‘Alternate Minimum Tax’ shall be applicable to all non-corporate assessees i.e. Individual, HUF, AOP/BOI, an artificial juridical person, Partnership, Limited Liability Partnership, etc.

However, AMT provisions are not applicable to an Individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI) and the artificial juridical person whose adjusted total income does not exceed ₹ 20,00,000.

Tax Credit for Alternate Minimum Tax u/s 115JD

(1) The credit for tax paid by a person under section 115JC shall be allowed to him in accordance with the provisions of this section.

(2) The tax credit of an assessment year to be allowed under sub-section (1) shall be the excess of alternate minimum tax paid over the regular income-tax payable of that year: However where the amount of tax credit in respect of any income-tax paid in any country or specified territory outside India under section 90 or section 90A or section 91, allowed against the alternate minimum tax payable, exceeds the amount of the tax credit admissible against the regular income-tax payable by the assessee, then, while computing the amount of credit under this sub-section, such excess amount shall be ignored.

(3) No interest shall be payable on tax credit allowed under sub-section (1). Amount of tax credit of AMT carried forward and set off
The amount of tax credit determined under subsection (2) shall be carried forward and set off in accordance with the provisions of sub-sections (5) and (6) but such carry forward shall not be allowed beyond the 15 assessment years immediately succeeding the assessment year for which tax credit becomes allowable under sub-section (1).

In any assessment year in which the regular income tax exceeds the alter¬nate minimum tax, the tax credit shall be allowed to be set off to the extent of the excess of regular income-tax over the alternate minimum tax and the balance of the tax credit, if any, shall be carried forward.

If the amount of regular income tax or the alternate minimum tax is reduced or increased as a result of any order passed under this Act, the amount of tax credit allowed under this section shall also be varied accordingly.

Question 10.
What is an LLP? How is it different from a partnership firm?
Answer:
A limited liability partnership (LLP) is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008. It is a legally separated entity from that of its partner.

Difference between LLP & Partnership Firm
Under “traditional partnership firm”, every partner is liable, jointly with all the other partners, and also severally for all acts of the firm done while he is a partner. However, under the LLP structure, the liability of the partner is limited to his agreed contribution. Further, no partner is liable on account of the independent or unauthorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.

Question 11.
XYZ LLP is being liquidated. Examine the liability of its partners in respect of its tax dues?
Answer:
Section 167C of the Income Tax Act, 1961 provides for the liability of partners of LLP in the event of its liquidation. In case of liquidation of an LLP, where tax due from the LLP cannot be recovered, every person who was a partner of the LLP at any time during the relevant previous year will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP. This provision would also apply where tax is due from any other person in respect of any income of any previous year during which such other person was an LLP.

Taxation Of Firms Including Llp And Provisions Of Alternate Minimum Tax U/S115jc Of Income Tax Act Notes

  • Firm is taxable at 30%. The surcharge is 12% if the total income exceeds ₹ 1 crore. And; Health and Education Cess @ 4% on Tax + Surcharge, if any.
  • Allowable Partner’s Remuneration considering provisions of section 40(b) of Income Tax Act:

Lower of the following: –
a. Remuneration debited/to be debited towards working partners; or;
b. Ceiling Limit computed as follows:

If Book Profit is negative: ₹ 1,50,000
If Book Profit is positive:
On Book Profits* up to ₹ 3,00,000: 90% of Book Profits or ₹ 1,50,000, whichever is higher
Add: On Book Profits above ₹ 3,00,000:60% of balance Book Profits*.
(‘Book Profits means Net Profit of firm after all adjustments of PGBP but before Partner’s Remuneration)

  • Allowable Interest on Partner’s Capital: 12% p.a. of Partner’s Capital.
  • Alternate Minimum Tax under section 115JC of Income Tax Act:
  • Applicability: Any non-corporate assessee except individuals and HUF.

It is applicable to those individuals and HUFs also whose Adjusted Total Income** exceeds ₹ 20,00,000 during the year.
– AMT is at 18.5% of Adjusted Total Income** + Surcharge, if applicable based on Adjusted Total Income** + Health and Education Cess @ 4%.

  • Consequently, considering the provisions of AMT, tax payable shall be taxable as per normal provisions of the Act OR; AMT, whichever is higher.
  • Adjusted Total Income is to be computed as follows: –

 

a. Total Income as per provisions of Act

b. Add:

  • Deductions under sections 80-LA to 80RRB (Except section 80P)
  • Deductions under section 10AA
  • Deductions under section 3 5AD

c. Less:

  • Depreciation on assets used in specified business for which deduction under section 3 5AD is claimed.

ASSESSMENT OF PARTNERSHIP FIRMS INVOLVING COMPUTATION OF ALLOWABLE PARTNERS REMUNERATION AND INTEREST ON PART¬NER’S CAPITAL:

CS Professional Advance Tax Law Notes

CS Professional Intellectual Property Rights Laws and Practices Notes ICSI Study Material Important Questions

Intellectual Property Rights Notes for CS Professional ICSI Study Material Important Questions

  1. Introduction to Intellectual Property Rights
  2. Types of Intellectual Property-Origin and Development- An Overview
  3. Role of International Institutions
  4. Patents
  5. Indian Patent Law
  6. Patent Databases & Patent Information System
  7. Preparation of Patent Documents
  8. Process of Examination of Patent Application
  9. Patent Infringement
  10. Recent Developments in Patent System
  11. Trademarks
  12. Copyrights
  13. Industrial Designs
  14. Geographical Indications
  15. Layout – Designs of Integrated Circuits
  16. The Protection of Plant Varieties and Farmers’ Rights
  17. Protection of Trade Secrets
  18. Key Business Concerns in Commercializing Intellectual Property Rights

Risk Management – Governance, Risk Management, Compliances and Ethics Important Questions

Risk Management – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
The risk evaluation process requires a mathematical approach and considerable data on the past losses. Comment
Answer:
The risk measurement process requires a mathematical approach and considerable data on the past losses. The data available from the concern itself may not be adequate enough to lend itself amenable to analytical exercise. Hence, it becomes necessary to resort to data on industry basis, at national and sometimes even at international level.

Risk evaluation includes the determination of the:

  • Probability or chances that losses will occur.
  • Impact the losses would have upon the financial affairs of the firm should they occur.
  • Ability to predict the losses that will actually occur during the budget period.

There are various statistical methods of quantifying risks. But the statistical methods are too technical and the risk manager then relies on his judgment. Risks are classified as modest, medium, severe etc. In either event, a ‘risk matrix’ can be prepared which essentially classifies the risks according to their frequency and severity.

Question 2.
What is Systematic Risk and Unsystematic Risk? Give examples.
Answer:
The concept of Systematic and Unsystematic risk may be explained as under:

Systematic Risk Unsystematic Risk
It is not fully uncontrollable by an organisation. It is usually controllable by an organisation.
It is not entirely predictable. It is reasonably predictable.
It is usually of a macro nature. It is normally micro in nature.
It usually affects a large number of organisations operating under a similar stream. If not managed it directly affects the individual organisation first.
It cannot be fully assessed and anticipated in advance in terms of timing and gravity. It can be usually assessed well in advance with reasonable efforts and risk mitigation can be planned with proper understanding and risk assessment techniques.
The example of such type of risks is Interest Rate Risk, Market Risk, Purchasing Power Risk. The examples of such risk are Compliance risk, Credit Risk, Operational Risk.

Question 3.
Liquidity and Solvency are altogether different. Do you agree? Discuss the types of liquidity risk.
Answer:
Solvency signifies the capability of the organization to pay its debt and dues. It represents the financial soundness of the organization. Whereas the liquidity risk arises due to mis-matches in the cash flow i.e. absence of adequate funds. Liquidity is altogether different from the word solvency. A firm may be in sound position as per the balance sheet, but if the current – assets are not in the form of cash or near cash assets, the firm may not make payment to the creditors which adversely affect the reputation of the firm.

Types of Liquidity Risk – The liquidity risk may be of two types, trading risk and funding risk:
a. Trading Risk : It may mean the absence of the liquidity or enough products or securities etc. to actually undertake buy and sell activities. e.g. in the context of securities trading inability to enter into derivative transactions with counter parties or make sales or purchase of securities.

b. Funding Risk : It refers to the inability to meet the obligations e.g. inability to manage funds by either borrowing or the sale of assets/ securities. It arises where the balance sheet of a firm contains illiquid financial assets which cannot be turned into cash within a very short time.

Therefore, it can be stated that Liquidity and Solvency are two different aspects.

Question 4.
What are the major financial risks which may adversely affect an organization?
Answer:
The risk which has some financial impact on the business entity is treated as financial risk. The major financial risks which may adversely affect an organisation are as follows:

1. Market Risk : This type of risk is associated with market ups and down. The market risks may be Absolute Risk (when it can be measured in rupee/currency term) and Relative Risk (relative to bench mark index). Hence the market risk may be defined as the risk to a firm due to the adverse changes in interest rates, currency rates, equity prices and commodity prices.

a. Interest Rate Risk : The financial assets which are connected with interest factors such as bonds/debentures, faces the interest rate risk. Interest rate risk adversely affects value of fixed income securities. Any increase in the interest reduces the price of bonds and debts instruments in debt market and vice versa.

b. Currency Risk : The volatility in the currency rates is called the currency risk. These risks affect the firms which have international operations of business and the quantum of the risk depends on the nature and extent of transactions with the external market.

c. Equity Risk : It means the depreciation in one’s investment due to the change in market index. Beta of a stock tells us the market risk of that stock and it is associated with the day do-day fluctuations in the market.

d. Commodity Risk : This type of risk is associated with the absolute changes in the price of the commodity. Since commodities are physical assets, hence the prices are changed on account of the demand and supply factor.

2. Credit Ris k: When a counter party is unable or unwilling to fulfil their contractual obligation, the credit risk arises. This type of risk is related to the probability of default and recovery date.

Question 5.
Discuss in brief the following; Risk management and corporate governance are inseparable.
Answer:
Risk management is the culmination of decision taken to improve corporate governance. Organizations that actively manage their risk have a better chance of achieving their objectives and preventing major problems happening. Thus, risk management and corporate governance are inseparable.

Question 6.
Whether Risk Management and Corporate Governance Principles have any relations? Explain.
Answer:
Risk management and corporate governance principles are strongly interrelated. An organization implements strategies in order to reach their goals. Each strategy hds related risks that must be managed in order to meet these goals.

Risk – Risk is an important element of corporate functioning and governance. There should be a clearly established process of identifying, analyzing and treating risks, which could prevent the company from effectively achieving its objectives.

The Board has the ultimate responsibility for identifying major risks to the organization, setting acceptable levels of risk and that appropriate risk management systems and procedure are in place to identify and manage risks. .

Risk governance – Good risk governance provides clearly defined accountability, authority, and communication/reporting mechanisms. The board shall have to identify the extent and type of risks it faces and the planning necessary to manage and mitigate the same for ensuring growth for the benefit of all the stakeholders.

Corporate governance – Corporate governance concerns the relationships among the management, board of directors, controlling shareholders, minority shareholders, and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to foreign capital. Incorporating risk management in corporate governance of an organisation is very important.

OECD Principles of Corporate Governance – The sixth principle of OECD Principles of Corporate Governance deals with the responsibilities of the board with respect to Risk Management and provides-

The board should fulfil certain key functions, including reviewing and guiding corporate strategy, major plans of action, risk management policies and procedures, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

Question 7.
Write short on the following; Importance of risk management in companies.
Answer:
“Risk Management” is a process which aims to assist organisations to identify, understand, evaluate and take action on their risks with a view to increasing the probability of their success and reducing the impact and likelihood of failure.

Importance of risk management:

  • Effective risk management gives comfort to shareholders, customers, employees, other stakeholders and society at large that a business is being effectively managed.
  • It helps the company or organisation confirm its compliance with corporate governance requirements. Risk management is relevant to all organisations large or small.
  • Effective risk management practices support accountability, performance measurement and reward and can enable efficiency at all levels through the organisation.

Effective Risk Management:
Risk management requires a detailed knowledge and understanding of the organization (both internal and external) and the processes involved in the business. To effectively manage risk, and seize the opportunity within every challenge, institutions must manage a variety of business dimensions.

In today’s world they must focus on maximizing digital capabilities, building ongoing expertise, driving fluid collaboration, developing top-notch analytics and fostering a risk culture that can withstand disruptive change. Better risk management techniques provide early warning signals so that the same may addressed in time. In traditional concept the natural calamities like fire, earthquake, flood, etc. were only treated as risk and keeping the safe guard equipments etc. were assumed to have mitigated the risk.

Question 8.
Briefly comment on the following statement; Well defined and implemented risk management polices has many potential advantages to an organization.
Answer:
The key advantages of having risk management are as under:

  • Risk Management in the long run always results in significant cost savings and prevents wastage of time and effort in firefighting. It develops robust contingency planning.
  • It can help plan and prepare for the opportunities that unravel during the course of a project or business.
  • Risk Management improves strategic and business planning. It reduces costs by limiting legal action or preventing breakages.
  • It establishes improved reliability among the stakeholders leading to an enhanced reputation.
    Sound Risk Management practices reassure key stakeholders through-out the organization.

Question 9.
What is risk? Discuss various phases of risk management cycle.
Answer:
‘Risk’ refers to the variations in the outcomes that could occur over a specified period in a given situation. If only one outcome is possible, the | variation and hence the risk is zero. If many outcomes are possible, the risk is not zero. The greater the variation, the greater the risk.

Risk may also be defined as the possibility that an event will occur and adversely affect the achievement of the company’s objective and goals. ‘Business risk’ is the threat that an event of action will adversely affect an organisation’s ability to achieve its business objective/targets. Business risk arises as much from the possibility that opportunities will not be realized as much from the fact that certain threats could well materialise and that errors could well be made.

The risk management cycle is an under:

  • Identification
  • Assesses
  • Evaluate the risk
  • Identify suitable responses to risk and select
  • Plan and resources
  • Implement, monitor and report

Question 10.
“Unit and unless risks are properly managed they may cause severe loss to the business.” In the context of this, discuss what steps you would like to take for the proper management of the risks of your business.
Answer:
Risks, if not managed properly may cause severe damage to the organisations and therefore almost all organisations develop sequential process to deal with risks.

The steps every business should take for the proper management of risk of business are as under:
1. Identification of risk: It is the first phase of the risk management process. The origin/source of the risk is identified.

2. Assessment of risk: After identifying the origin of the risk the second step is assessment of the risk. A business organisation faces various threats and vulnerabilities that may affect its operation or the fulfilment of its objectives. Therefore, the quantum and severity of risk involved is assessed.

3. Analysing and evaluating the risk: It is the third step where the risk is analysed and evaluated. The risk analysis involves thorough examination of the risk sources, its positive and negative consequences, the likelihood of the consequences that may occur and the factors that affect them and assessment of any existing controls or processes that tend to minimize negative risks or enhance positive risks.

4. Handling of risk: The ownership of risk should be allocated. The persons concerned when the risk arises, should document it and report it to the higher ups in order to have the early measures to get it minimized. Risk may be handled in the following ways:

  • Risk Avoidance
  • Risk Retention/absorption – it may be active or positive
  • Risk Reduction
  • Risk Transfer

5. Implementations of decision: The last step in the risk management process is the implementation of the decision. It is recommended to the Board or the organization to use various alternatives of tackling the risks. After getting it approved, initiate measures to implement it.

Question 11.
Risk management is a structured consistent and continuous process applied across the organization for the identification and assessment of risks control assessment and exposure monitoring. In the light of the statement discuss the risk management process and advantages of risk management.
Answer:
Risk management is a structured, consistent and continuous process, applied across the organisation for the identification and assessment of risks, control assessment and exposure monitoring.

Objectives of the Company’s risk management framework – The objectives of the Company’s risk management framework comprise the following:

  • To identify, assess, priorities and manage existing as well as new risks in a planned and coordinated manner.
  • To increase the effectiveness of internal and external reporting structure.
  • To develop a risk culture that encourages employees to identify risks and associated opportunities and
  • respond to them with appropriate actions

Advantages of Risk Management – Properly implemented risk management has many potential advantages to an organization in the form of:

  • Better informed decision making – for example in assessing new opportunities.
  • Less chance of major problems in new and ongoing activities.
  • Increased likelihood of achieving corporate objectives.

Question 12.
What are the different dimensions of identifying threats in Risk Analysis process? In a company there is a probability of increase of 40% cost of raw material from present level of ₹ 10 crores. What shall be risk value of cost of production?
Answer:
There are various stages in risk management process. After identification of the risk parameters, the second stage is of analyzing the risk which helps to identify and manage potential problems that could undermine key business initiatives or projects.

Risk Analysis – To carry out a Risk Analysis, first the possible threats are identified and then the likelihood that these threats will materialize is estimated. The analysis should be objective and should be industry specific.

The first step in Risk Analysis is to identify risks or threats both existing and possible which may pertain to:

  • Human : Illness, death, injury, or other loss of a key individual.
  • Operational : Disruption to supplies and operations, loss of access to essential assets, or failures in distribution.
  • Reputational : Loss of customer or employee confidence, or damage to market reputation.
  • Procedural : Failures of accountability, internal systems, or controls, or from fraud.
  • Project : Going over budget, taking too long on key tasks, or experiencing issues with product or service quality.
  • Financial : Business failure, stock market fluctuations, interest rate changes, or non-availability of funding.
  • Technical : Advances in technology, or from technical failure.
  • Natural : Weather, natural disasters, or disease. –
  • Political : Changes in tax, public opinion, government policy, or foreign influence.
  • Structural : Dangerous chemicals, poor lighting, falling boxes, or any situation where staff, products, or technology can be harmed.

There is a probability of increase of 40% of price rise in the raw material. If this happens, it will increase the cost of production in the next year. So, the risk value of the cost of the production can be derived by the following formula:
Risk valuer Probability of event x Cost of event By, putting the values
Risk value= 0.40 (Probability of event) x ₹ 10 Crores (Cost of event) = ₹ 4 Crores

Question 13.
Your company is running its corporate office in a rented business premises. The Landlord of the building has increased the rent of other companies and there are 80% chances of increase in the rent of the office occupied by your company within the next year. If this happens, it will cost your business an extra ₹ 5,00,000 over the next year. Calculate the risk value.
Answer:
The formula for calculating the Risk Value is:
Risk Value = Probability of Event x Cost of Event
By putting the values, we get:
0.80 (Probability of Event) x ₹ 500, 000 (Cost of Event) = ₹ 4,00,000 (Risk Value)

Question 14.
Point out the situations where the Risk Analysis may be useful.
Answer:
Risk management process comprises of five stages. After identification of the risk parameters, the second stage is of analyzing the risk which _ helps to identify and manage potential problems that could undermine g key business initiatives or projects.

Process of Risk Analysis:
To carry out a Risk Analysis, first the possible threats are identified and then estimate the likelihood that these threats will materialize. The analysis should be objective and should be industry specific. Within the industry, the scenario based analysis may be adopted taking into consideration of possible events that may occur and its alternative ways to achieve the given target.

Risk Analysis can be complex, as it requires to draw on detailed information such as project plans, financial data, security protocols, marketing forecasts and other relevant information. However, it is an essential planning tool, and one that could save time, money and reputations.

Risk analysis can be useful in many situations like:

  1. While planning projects, to help in anticipating and neutralizing possible problems.
  2. While deciding whether or not to move forward with a project.
  3. While improving safety and managing potential risks in the workplace.
  4. While preparing for events such as equipment or technology failure, theft, staff sickness, or natural disasters.
  5. While planning for changes in environment, such as new competitors coming into the market, or changes to government policy.

Question 15.
Companies are not entirely free to decide on how they shall handle their risks. Discuss this statement in the light of prescribed regulation of the SEBI (Listing Obligation & Disclosure Requirements) Regulations, 2015.
Answer:
Risk can be handled in the following ways:
1. Risk Avoidance: Risk Avoidance means to avoid taking or choosing of less risky business/project. For example one may avoid investing in stock market due to price volatility in stock prices and may prefer to invest in debt instruments.

2. Risk Retention /absorption: It is the handling the unavoidable risk internally and the firm bears /absorbs it due to the fact that either because insurance cannot be purchased of such type of risk or it may be of too expensive to cover the risk and much more cost-effective to handle the risk internally. Usually, retained risks occur with greater frequency, but have a lower severity. An insurance deductible is a common example of risk retention to save money, since a deductible is a limited risk that can save.

There are two types of retention methods for containing losses as under:

  • Active Risk Retention: Where the risk is retained as part of deliberate management strategy after conscious evaluation of possible losses and causes.
  • Passive Risk Retention: Where risk retention occurred through negligence. Such type of retaining risk is unknown or because the risk taker either does not know the risk or considers it a lesser risk than it actually is.

3. Risk Reduction: In many ways physical risk reduction is the best way of dealing with any risk situation and usually it is possible to take steps to reduce the probability of loss. It is done at the planning stage of any new project when considerable improvement can be achieved at little or no extra cost.

4. Risk Transfer: This refers to legal assignment of cost of certain potential losses to another. The insurance of ‘risks’ is to occupy an important place, as it deals with those risks that could be transferred to an organization that specialises in accepting them, at a price. Usually, there are 3 major means of loss transfer viz.,

  • By Tort
  • By contract other than insurance
  • By contract of insurance

Question 16.
“The rapidly growing global economy has created an expanding array of risks to be managed to ensure the viability and success of an enterprise” Discuss the statement enumerating classes of risk and the ways of risk handling.
Answer:
Risk may be summarized as hereunder:

  • Credit Risks
  • Industry and Services Risks
  • Legal Risks
  • Liquidity Risks
  • Disaster Risks
  • System Risks
  • Management and Operation Risks
  • Market Risks
  • Political Risks
  • Non compliance and related risks

Risk can be handled broadly in four ways:

  • Risk Avoidance
  • Risk Reduction
  • Risk Retention
  • Risk Transfer

Question 17.
What is risk retention? Distinguish between risk retention and risk transfer.
OR
Describe and differentiate risk reduction and risk retention.
Answer:
Risk reduction – Risk reduction means prevention of loss by taking steps to reduce the probability of loss. The ideal time to think of risk reduction measures is at the planning stage of any new project when considerable improvement can be achieved at little or no extra cost. It is the best way of dealing with any risk. Risk prevention should be evaluated in the same way as other investment projects as it will save a lot of cost and energy at a later stage.

Risk retention – “Risk retention” is the process of handling the unavoidable risk internally. The firm bears/absorbs the risk due to the fact that insurance of such a type of risk cannot be purchased or it may be too expensive to cover the risk and much more cost-effective to handle the risk internally.

Retained risks occur with greater frequency, but have a lower severity.

Methods of risk retention – There are two types of retention methods for containing losses as under:

Active Risk Retention : Where the risk is retained as part of deliberate management strategy after conscious evaluation of possible losses and causes.

Passive Risk Retention : Where risk retention occurred through negligence. Such type of retaining risk is unknown or because the risk taker either does not know the risk or considers it a lesser risk than it actually is.

Question 18.
Discuss in brief the following; Risk management.
Answer:
Risk is an important element of corporate functioning and governance. There should be a clearly established process of identifying, analyzing and treating risks, which could prevent the company from effectively achieving its objectives.

It also involves establishing a link between risk return and resourcing priorities. Appropriate control procedures in the form of a risk management plan must be put in place to manage risk throughout the organization. The plan should cover activities as diverse as review of operating performance, effective use of information technology, contracting out and outsourcing.

Question 19.
While conducting the Audit, Secretarial Auditor found that by forged signature, accountant had transferred huge amount in dummy account. There was a big financial scam in the organization. Reporting on fraud, Management has desired that a Risk Management Policy to detect and control the Fraud be prepared.
Being a Company Secretary, point out the major aspects to be included in Fraud Risk Management Policy.
Answer:
The management should be pro-active in fraud related matter. A fraud is usually not detected until and unless it is unearthed. A Fraud Risk Management Policy should be incorporated, aligned to its internal control and risk management. The Fraud Risk Management Policy will help to strengthen the existing anti-fraud controls by raising the awareness across the company and promote an open and transparent communication culture.

It would also promote zero tolerance to fraud/misconduct and encourage employees to report suspicious cases of fraud/misconduct. The policy would spread awareness amongst employees and educate them on risks faced by the company.

The major aspects to be included in Fraud Risk Management Policy are –
1. Defining fraud : This shall cover activities which the company would consider as fraudulent.

2. Defining Role & responsibilities : The policy may define the responsibilities of the officers who shall be involved in effective prevention, detection, monitoring & investigation of fraud. The company may also consider constituting a committee or operational structure that shall ensure an effective implementation of anti-fraud strategy of the company. This shall ensure effective investigation in fraud cases and prompt as well as accurate reporting of fraud cases to appropriate regulatory and law enforcement authorities.

3. Communication channel : Encourage employees to report suspicious cases of fraud/misconduct. Any person with knowledge of suspected or confirmed incident of fraud/misconduct must report the case immediately through effective and efficient communication channel or mechanism.

4. Disciplinary action: After due investigations disciplinary action against the fraudster may be considered as per the company’s policy.

5. Reviewing the policy: The employees should educate their team members on the importance of complying with Company’s policies & procedures and identifying/reporting of suspicious activity, where a situation arises. Based on the developments, the policy should be reviewed on periodical basis.

Question 20.
Write short note on the following; Fraud risk management.
Answer:
The fraud risk management policy will help to:

  • Strengthen the existing anti-fraud controls by raising the awareness across the company.
  • Promote an open and transparent communication culture.
  • Promote zero tolerance to fraud/misconduct.
  • Encourage employees to report suspicious cases of fraud/misconduct.
  • Spread awareness amongst employees and educate them on risks faced by the company.

Such a policy may include the following:

  • Defining fraud
  • Defining Role & responsibilities
  • Communication channel
  • Disciplinary action
  • Reviewing the policy

Question 21.
Write the relevant provisions of the Companies Act, 2013 relating to the reporting of fraud.
Answer:
Following are the provisions related to reporting of fraud under Companies Act, 2013:
Section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 provides that if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving an amount of rupees one crore or above, is being or has been committed ‘ in the company by its officers or employees, the auditor shall report the matter to the Central Government.

Rule 13(2) of Companies (Audit and Auditors) Rules, 2014 provides that the auditor shall report the matter to the Central Government as under:
1. Reporting the matter to the Board/Audit Committee immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within 45 days.

2. On receipt of such reply or observations, the auditor shall for¬ward his report and the reply or observations of the Board/Audit Committee along with his comments to the Central Government within 15 days from the date of receipt of such reply or observations.

3. In case the auditor fails to get any reply or observations from the Board/Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his report.

4. The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same.

5. The report shall be on the letter-head of the auditor containing postal address, email address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number.

6. The report shall be in the form of a statement as specified in Form ADT-4.

Fraud value less than one crore – Rule 13(3) of Companies (Audit and Auditors) Rules, 2014 further states that in case of a fraud involving lesser than one crore rupees, the auditor shall report the matter to Audit Committee/Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the nature of Fraud with description, approximate amount involved; and Parties involved and the same shall also be disclosed in the Board’s Report.

Penal Provisions – The person guilty of the offence shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Question 22.
Discuss briefly the following: Reputation risk
OR
Elucidate the following; Reputational risk management.
Answer:
The Reserve Bank of India in its Master Circular dated July 1, 2015 has defined the Reputation Risk as:
The risk arising from negative perception on the part of customers, counter parties, shareholders, investors, debt-holders, market analysts; other relevant parties or regulators that can adversely affect a bank’s ability to maintain existing, or establish new, business relationships and continued access to sources of funding.

For example: through the interbank or securitisation markets.
Reputational Risk Management- For managing the reputation risk, the following principles are worth noting:

  • Integration of risk while formulating business strategy.
  • Effective board oversight.
  • Image building through effective communication.
  • Promoting compliance culture to have good governance.
  • Persistently following up the Corporate Values.
  • Due care, interaction and feedback from the stakeholders.
  • Strong internal checks and control.
  • Peer review and evaluating the company’s performance.
  • Quality report/newsletter publication.
  • Cultural alignment.

Question 23.
You are the company secretary of Nodal Power Company Ltd your ® board of directors wants to understand its responsibilities for reviewing j the company’s policies on risk oversight and management in the light of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 and satisfy itself whether the management has developed and implemented a sound system of risk management and control.
Prepare board note discussing the responsibilities of the board on risk management and the relevant provisions on risk management under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Answer:
To,
The Board of Directors
Nodal Power Company Limited
Sub: Responsibility of Board of Directors on Risk Management
Dear Sir,
It is pertinent to note that following are the legal provisions of risk management under SEBI (LODR) Regulations 2015.
SEBI (LODR) Regulations, 2015 provides that company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. The Board shall be responsible for framing, implementing and monitoring the risk management plan for the company.

The Risk Management Plan must include all elements of risks. The traditional elements of potential likelihood and potential consequences of an event must be combined with other factors like the timing of the risks, the correlation of the possibility of an event occurring with others, and the confidence in risk estimates.

Risk management policies should reflect the company’s risk profile and should clearly describe all elements of the risk management and internal control system and any internal audit function.

A company’s risk management policies should clearly describe the roles and accountabilities of the board, audit committee, or other appropriate board committee, management and any internal audit function.

A company should have identified Chief Risk Officer manned by an individual with the vision and the diplomatic skills to forge a new approach. He may be supported by “risk groups” to oversee the initial assessment work and to continue the work till it is completed.

Regulation 21 of SEBI (LODR) Regulations, 2015, requires that every listed company should have a Risk Management Committee.

Question 24.
A company secretary can play a significant role in ensuring that a sound enterprise risk management (ERM) which is effective throughout the company is in place explain.
OR
Briefly comment on the following; Role of company secretary in evaluating risk management efforts in the organization is significant.
OR
Discuss the role of company secretary in addressing risk management.
OR
Write a note on the following; Role of company secretary in ensuring risk management.
Answer:
The company secretaries are governance professionals whose role is to enforce a compliance framework to safeguard the integrity of the organization and to promote high standards of ethical behaviour. Following are their functions:

  • Advising on best practice in governance, risk management and compliance.
  • Championing the compliance framework to safeguard organizational integrity.
  • Promoting and acting as a ‘sounding board’ on standards of ethical and corporate behaviour.
  • Balancing the interests of the Board or governing body, management and other stakeholders.

In terms of Section 203(l)(ii) of Companies Act, 2013, a Company Secretary is a Key Managerial Person. Hence being a top level officer and board confidant, a Company Secretary can play a role in ensuring that a sound Enterprise wide Risk Management [ERM] which is effective throughout the company is in place.

Question 25.
Answer the following in brief; Write a note on ISO 31000.
Answer:
ISO 31000 published on the 13th of November, 2009, provides a standard j on the implementation of risk management. ISO 31000 seeks to provide a universally recognized paradigm for practitioners and companies employing i risk management processes. ISO 31000 contains 11 key principles that position risk management as a fundamental process in the success of the organization.

Governance Risk Management Compliances and Ethics Notes

Audit Principles and Techniques – Secretarial Audit Compliance Management and Due Diligence Important Questions

Audit Principles and Techniques – Secretarial Audit Compliance Management and Due Diligence Important Questions

Question 1.
What do you mean by ‘materiality’ in auditing? As an auditor of a company, how will you comply with materiality concept in auditing?
Answer:
1. Materiality can be defined as the magnitude of an omission or mis-statement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

2. SA 320 “Materiality in Planning and Performing an Audit”, establishes standards on the concept of materiality and the relationship with audit risk while conducting an audit. Hence, the auditor requires more reliable evidence in support of material items.

3. SA 320 defines material items as relatively important and relevant items, ie., items the knowledge of which would influence the decision of the user of financial statements.

4. The auditor has to ensure that material items are properly and distinctly disclosed in the financial statements.

5. It is very important for the auditor who has constantly to judge whether a particular item is material or not. There is an inverse relationship between materiality and the degree of audit risk. The higher the materiality level, the lower the audit risk and vice versa.

Question 2.
What is materiality concept in auditing? Explain.
Answer:
Material means important and essential. The disclosure of important matters helps the users in taking business decisions.
1. The concept of materiality should be considered by the auditor while determining the nature, timing and extent of audit procedures and evaluating the effect of the misstatements.

2. The Auditor has to report the errors which he judges to be material, the audit work can be planned in the knowledge that it need to detect errors that are material.

3. The concept of materiality is used both at the planning stage of the audit, when deciding what and how much work need to be done and in evaluating the result of the audit, which is generally known as planning materiality and reporting materiality.

4. The concept of the materiality draw the whole process of the audit, the user of the audit report does not require the absolute accuracy to make informed decision, accordingly a matter is considered material if its omission or misstatement would reasonably influence the decision of an intended user of the audit report.

5. In accessing materiality, the prime consideration is the total value of the error. However, the values is not the sole consideration, the nature of the error or the context in which the transaction occurs are sometimes more important and the auditor must always consider these factors, as well as the value, when deciding whether an error is material.

6. Materiality consists of both quantitative and qualitative factors. Materiality is often considered in terms of monetary value but the inherent nature or characteristics of an item or group of items may also render a matter material. Materiality is a matter of professional judgment and depends on the auditor’s interpretation of the users’ needs. A matter can be judged material if knowledge of it is likely to influence the decisions of the intended users.

7. In formulating audit opinion or report, the auditor should inter alia give due regard to the materiality of the matter keeping in view the amount, nature and context. Materiality is determined for:

  • Planning purposes.
  • Purposes of evaluating the evidence obtained and the effect of identified instances of misstatement or non-compliance.
  • Purposes of reporting the results of the audit work.

Question 3.
What are the points for consideration in audit planning in relation to audit engagement?
Answer:
Audit planning requires a high degree of discipline on the part of the auditor. In order to make the planning more meaningful, the auditor should take into consideration the following matters in relation to the audit engagement:

  1. Preliminary Work to be done in addition to the real audit work.
  2. Changes in legislation, accounting or any auditing standards or guide-lines.
  3. Analytical review of available management accounts and other management information that relate to the accounts.
  4. Changes in the business or management.
  5. Changes in the accounting system.
  6. Deadlines established for the submission of audit report.
  7. Use of Rotational Testing and Verification.

Question 4.
What precautions should be taken while adopting test checking?
Answer:
While adopting the test check, the auditor must take the following precautions:

  1. Entries selected for test checking must be representative of all trans-actions.
  2. Selection of the items should be at random.
  3. Client’s staff should not come to know of the entries selected for test checking.
  4. Period selected for test checking should differ from book to book and year to year.
  5. Test checking should not be adopted where the law requires thorough audit.
  6. Entries of the first and last month of the year must be checked thoroughly.
  7. Test should be so devised that a sizeable portion of the work done by each employee is checked.
  8. Control accounts or impersonal ledger should not be subject to test checking.
  9. Bank statement and entries for cash withdrawal and cash deposits should be checked in full.

Question 5.
List out five factors that influence the reliability of audit evidence as per SA 500.
Answer:
As per SA 500 on audit evidence, following are the factors that influence reliability of audit evidence:

  1. Audit evidence obtained from independent source outside the entity is more reliable.
  2. Audit evidence that is generated internally is more reliable when the related internal controls are effective.
  3. Audit evidence obtained directly by auditor is more reliable than evidence obtained indirectly or by inference.
  4. Audit evidence is more reliable when it exits in documentary form.
  5. Audit evidence of original document is more reliable than photo or scanned copies.

Question 6.
Why is there a need of external experts opinion on various technical matters to auditors?
Answer:
1. An auditor may take external expert’s opinion on various technical matters which forms the audit evidence. The auditor has to place reliance on the opinion expressed by the external expert considering his reliability, competency, consistency with data & information and independence.

2. In case of an external expert it shall be ensured that the interests and relationship of the external expert does not constitute a threat to that expert’s objectivity.

3. The auditor shall evaluate adequacy of expert’s work having regard to the following:

  • Relevance and reasonableness of expert’s findings/conclusions and consistency thereof with other audit evidence.
  • Relevance and reasonableness of assumptions and methods used in the expert’s work.
  • Relevance, reasonableness, accuracy and completeness of source data (if any) used in the expert’s work provided, such data are significant for the Expert’s Work.
  • Agreement with the expert on the nature and extent of further work by the expert in case expert’s work is found to be inadequate for audit purpose.
  • Performance of additional, appropriate audit procedures in case expert’s work is found to be inadequate for audit purpose.

Question 7.
What is Audit Trail and why there is a need of creation of Audit Trails?
Answer:
1. Audit Trail is a repository of administrative and operational documentation relating to audit process. It is established and maintained to aid in audit planning and to centralize available documentation and information not included in the individual audit files.

2. The auditor should prepare and maintain working papers, the form and content of which should be designed to meet the circumstances of a particular engagement. The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters.

3. Working papers serve mainly to –

  • Provide the principal support for the auditor’s report, including his representation regarding observance of the standards of field work, which is implicit in the reference in his report to generally, accepted auditing standards.
  • Aid the auditor in the conduct and supervision of the audit.

4. Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement. Examples of working papers  are audit programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films, or other media.

Working papers ordinarily should include documentation showing that –

  • The work has been adequately planned and supervised, indicating observance of the first standard of field work.
  • A sufficient understanding of internal control has been obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.
  • The audit evidence obtained, the auditing procedures applied, and the testing performed have provided sufficient competent evidential matter to afford a reasonable basis for an opinion, indicating observance of the third standard of field work.

5. Working papers are the property of the auditor. The auditor’s rights of ownership, however, are subject to ethical limitations relating to the confidential relationship with clients. Certain of the auditor’s working papers may sometimes serve as a useful reference source for his client, but the working papers should not be regarded as a part of, or a substitute for, the client’s accounting or other records.

6. The auditor should adopt reasonable procedures for safe custody of his working papers and should retain them for a period sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements of records retention.

7. Audit working papers provide evidence of audit coverage and documentation of audit trails, they should be properly filed and stored. In addition there should be a standardized format for working papers, adequate cross-referencing to identify the audit working papers created as well as a system for filing and retrieving working papers.

Question 8.
Differentiate between Audit Plan and Audit Programme.
Answer:
Difference between Audit plan and Audit Programme :

Audit Plan Audit Programme
Audit Plan lays down the audit strategies to be followed for conducting an audit such as identifying the areas where special audit consideration and skills maybe necessary, obtain the knowledge of business etc.

Plans should be made to cover the following among other things :
1. Acquiring knowledge of accounting systems, policies and internal control procedures.
2. Establishing the expected degree of reliance to be placed on the internal control.
3. Determining the nature, timing and extent of the audit procedures to be performed.
4. Co-ordinating the work to be done.

Audit Programme is an outline of how the audit is to be done, who is to do what work and within what time

It lays down the following audit procedure to be followed:
1. Evaluation process.
2. Ascertaining accuracy.
3. Verification of Document.
4. Scrutiny of supporting Documents.
5. Checking of overall disclosure and presentation of all items in the audit completion.
6. Preparation and submission of audit report.

Question 9.
Why is there a need of external experts’ opinion on various technical matters to auditors?
Answer:
An auditor may take external expert’s opinion on various technical H matters which forms the audit evidence. The auditor has to place reliance g on the opinion expressed by the external expert considering his reliability, competency, consistency with data & information and independence. § In case of an external expert it shall be ensured that the interests and relationship of the external expert does not constitute a threat to that expert’s objectivity. The auditor shall evaluate adequacy of expert’s work having regard to the following :

  • Relevance and reasonableness of expert’s findings/conclusions and consistency thereof with other audit evidence.
  • Relevance and reasonableness of assumptions and methods used in the expert’s work.
  • Relevance, reasonableness, accuracy and completeness of source data (if any) used in the expert’s work provided such data are significant for the expert’s work.
  • Agreement with the expert on the nature and extent of further work by the expert in case expert’s work is found to be inadequate for audit purpose.
  • Performance of additional, appropriate audit procedures in case expert’s work is found to be inadequate for audit purpose.

Question 10.
What is materiality concept in auditing? Explain.
Answer:
1. The concept of the materiality draw the whole process of the audit, the user of the audit report does not require the absolute accuracy to make informed decision, accordingly a matter is considered material if its omission or misstatement would reasonably influence the decision of an intended user of the audit report.

2. The concept of materiality should be considered by the auditor while determining the nature, timing and extent of audit procedures and evaluating the effect of the misstatements. Materiality consists of both quantitative and qualitative factors.

3. The concept of materiality is used both at the planning stage of the audit, when deciding what and how much work need to be done and in evaluating the result of the audit, which is generally known as planning materiality and reporting materiality.

Question 11.
What is Audit Trail and why there is a need of creation of Audit Trails?
Answer:
1. Audit Trail is a repository of administrative and operational docu-mentation relating to audit process. It is established and maintained to aid in audit planning and to centralize available documentation and information not included in the individual audit files.

2. The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters.

3. Working papers serve mainly to :
a. Provide the principal support for the auditor’s report, including his representation regarding observance of the standards of field work which is implicit in the reference in his report to generally, accepted auditing standards.

b. Aid the auditor in the conduct and supervision of the audit. Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement. Examples of working papers are audit programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films or other media.

Question 12.
Describe the auditing principles which should be observed by any auditor while performing any audit.
Answer:
The auditing principles define governing an audit and include the professional responsibilities which should be observed by the auditor while carrying out any audit assignments. The auditing principles should be observed by any auditor while performing any audit are:
1. Integrity objectivity and independence: An auditor should be honest, sincere, impartial and free from bias. He should be a man of high g integrity and objectivity.

2. Confidentiality: The auditor should respect confidentiality of information acquired during the course of his work and. should not disclose * the information without the prior permission of the client, unless there is a legal duty to disclose.

3. Skill and competence: The auditor must acquire adequate training and experience. He should be competent, skilful and keep himself abreast of the latest developments including various pronouncements.

4. Work performed by others: If the auditor delegates some work to others and uses work performed by others including that of an expert, he continues to be responsible for forming and expressing his opinion on the financial information.

5. Planning: The auditor should plan his work to enable him to conduct the audit in an effective, efficient and timely manner. He should ac-quire knowledge of client’s accounting system, the extent of reliance that could be placed on internal control and coordinate the work to be performed.

6. Documentation: The auditor should document matters which are important in providing evidence to ensure that the audit was carried out in accordance with the basic principles.

7. Audit evidence: The auditor should obtain sufficient appropriate evidences through the performance of compliance and other substantive procedures to enable him to draw reasonable conclusions to form an opinion on the financial information.

8. Accounting System and Internal Control: The management is responsible for maintaining an adequate accounting system incorporating various internal controls appropriate to the size and nature of business. The auditor should assure himself that the company’s internal control system is adequate and all the information which should be recorded has been recorded.

9. Audit conclusions and reporting: On the basis of the audit evidence, the auditor should review and assess the audit conclusions.

Question 13.
Write down the various factors which should be considered by the auditor while forming an audit plan.
Answer:
The Audit planning helps to develop an audit approach which will ensure that sufficient appropriate evidence is gathered to support the audit opinion in the most cost effective manner. Factors which should be considered by the auditor while forming an audit plan:

  1. The Audit should be planned in such manner, which ensures the high quality of audit in economic, efficient, and effective way and in a timely manner.
  2. The Audit plan should be documented and should be kept with the audit working papers.
  3. The Inter related steps and events should be clubbed together.
  4. The elements of an audit plan may be similar for different auditee entities. However, the actual contents may differ from auditee to auditee enterprise, and on nature, type & objective of the audit or authentication assignment.
  5. The audit plan should be reviewed by the experienced auditor, normally not engaged on the assignment. Their experience may be useful to modify the audit plan to meet the audit objectives more vigorously.
  6. The audit plan should be flexible enough to accommodate modifications which may be necessary and should be carried out with the approval of team leader.
  7. Auditing involves the collection and analysis of facts and data sufficient to reach reliable and valid conclusions about the subject of the audit.
  8. The Auditing staff should be made familiar of the quality control policies and procedures of the firm. The hierarchy, responsibility & authority for decision making needs to be clearly defined and understood by the audit staff.
  9. The Audit plan includes the nature, timing and extent of audit procedures to be performed by audit teams. Sometimes audit plan requires modification based on revised consideration of assessed risks.

Question 14.
Describe the component of audit risk with examples.
Or
Auditing risk means that an auditor accepts/presumes some level of uncertainty in performing the audit work, which means that the auditor accepts the risk that the auditor opinion given by the auditor might be wrong. Comment
Answer:
Auditing risk means that an auditor accepts/presumes some level of uncertainty in performing the audit work, which means that the auditor accepts the risk that the audit opinion given by the auditor might be wrong. Only a very small degree of audit risk would be acceptable as otherwise the audit process may lose its purpose.

The audit risk has three components:
1. Inherent Risk: Inherent risk is the susceptibility of a class of trans¬action to misstatement that could be material, individually or when aggregated with misstatements in other transaction, .assuming that there were no related internal controls.

For example: Genuineness of the related party transactions.

2. Control Risk: Control Risk is the risk that a misstatement that could occur in an class of transactions and that could be material individually or when aggregated with misstatement on other transaction, will not be prevented or detected and corrected on a timely basis by the internal control systems.

For example: Delay in the filing of forms.

3. Detection Risk: Detection Risk is the risk that an auditor’s substantive audit procedures will not detect a misstatement that exist in class of transactions that could be material, individually or when aggregated with misstatement on other transaction.

For example: While certification of e-form, the auditor has overlooked the compliance of the Secretarial Standards.

4. The auditor should maintain the high level of the assurance/confidence while expressing the audit opinion, and this is the most important steps in the audit planning to ensure that the audit team will gather competent, relevant and reasonable audit evidence at minimum cost.

Question 15.
Enumerate the process of the audit planning.
Answer:
The process of audit planning should include the following elements:

  1. The purpose and objectives.
  2. Legal framework under which the audit is being conducted.
  3. Significant areas and issues involved.
  4. Process and technique to be adopted.
  5. Check points activities.
  6. Allocation of work contents amongst the staff.
  7. Time schedules for completion of various tasks/phases.
  8. Determining time lines for submission of draft report, discussion thereon with the auditee and submission of final report.
  9. Areas to be classified on “Risk” criteria to allocate suitable resources.
  10. Determining the extent of detailed examination and coverage in terms of volume.
  11. Evaluation of internal controls and professional work carried out by other agencies/experts and placing reliance thereon.
  12. Materiality considerations and determining the threshold therefore.
  13. Structure, contents of the report.

Question 16.
What are the benefits of the Audit Checklists?
Answer:
The benefits of the audit checklists are as under:

  1. Promote planning for the audit.
  2. Ensure a consistent audit approach.
  3. Act as a sampling plan and time manager.
  4. Serve as a memory aid.
  5. Provide a repository for notes collected during the audit process (audit field notes)
  6. Audit checklists provide assistance to the audit process.
  7. Auditors need to be trained in the use of a particular checklist and be shown how to use it to obtain maximum information by using good questioning techniques.
  8. Checklists assist an auditor to perform better during the audit process.
  9. Checklists help to ensure that the audit is conducted in a systematic and comprehensive manner and adequate evidence is obtained.
  10. Checklists provide the structure and continuity to the audit and ensure that the audit scope is being followed.
  11. Checklists provide a means of communication and a place to record data for use for future reference.
  12. A completed checklist provides objective evidence that the audit was performed.
  13. A checklist provides a record.
  14. Checklists can be used as an information base for planning future audits.
  15. Checklists can be provided to the auditee ahead of the onsite audit.

Question 17.
“Before going for the audit planning, it is necessary for an auditor to have thorough understanding of the auditee entity and its operations, which helps in designing an efficient and effective audit approach so that the audit resources are focused on the areas of greatest risk and audit methods which meet audit objectives at minimum cost are adopted in obtaining competent, relevant and reasonable evidence to support the audit judgment and conclusions.” Comment
Or
Write Short Note on Collection of Information of Auditee.
Answer:
Before going for the audit planning, it is necessary for an auditor to have thorough understanding of the auditee entity and its operations, which helps in designing an efficient and effective audit approach so that the audit resources are focused on the areas of greatest risk and audit methods which meet audit objectives at minimum cost are adopted in obtaining competent, relevant and reasonable evidence to support the audit judgment and conclusions. The audit team should:

1. Familiarize itself with:

  • The operations and organisation of the auditee entity.
  • The financial statement.
  • The regulatory framework.
  • The general legal framework governing the entity operations.

2. Understand the accounting processes and the degree of the technology involvement.

3. Access the overall control environment and in particular the control to prevent irregularity, illegality and fraud.

4 Perform preliminary analytical procedures.

5. Analyze the financial statement into account areas.

Question 18.
“Auditor draws conclusions about the large volume of data (population) by selecting a sample out of such data. The sample size determines the quantum of risk that the auditor is ready to accept.” Inflight of the given statement explain the concept of Audit Sampling.
Or
Write Short Note on “Audit Sampling”.
Answer:
1. Auditor draws conclusions about the large volume of data (population) by selecting a sample out of such data. The sample size determines the quantum of risk that the auditor is ready to accept. There are no set rules for defining the sample size. Sample size depends upon the experience and professional judgment of the auditor and is also based on “Audit risk” factor.

2. The Application of audit procedures to less than 10096 of the population of documents/items relevant for audit such that all sampling units have a chance for selection (for applying audit procedure thereon) so as to provide the auditor a reasonable basis on which conclusion about the entire population can be drawn is known as “Audit Sampling”.

3. The Sample design, size & selection of items for testing should meet the following:

  • Purpose of the audit procedure and population characteristics shall be considered for designing an audit sample.
  • Sample size shall be so chosen as to reduce sampling risk to an acceptable low value.
  • Random sampling, whenever practicable, shall be considered so that each sampling unit shall have reasonable chance of selection.
  • For sampling, use of stratification and value-weighted selection will increase audit efficiency.

Question 19.
What is “External confirmation”? Enumerate the cases when the auditor shall evaluate whether results of external confirmation provide relevant and reliable audit evidence or whether further audit evidence is necessary.
Answer:
1. “External confirmation” means Audit evidence obtained as a direct written response to the auditor from a third party (confirming party) on paper or electronic media or in any other form.

2. External confirmation enumerates steps as follows:

  • Determine information to be confirmed/requested.
  • Select appropriate confirming party.
  • Design/format confirmation request.
  • Send the request with follow up.

3. The auditor shall evaluate whether results of external confirmation provide relevant and reliable audit evidence or whether further audit evidence is necessary in following cases:

  • Where the auditor doubts the reliability of response further audit evidence should be obtained to resolve doubt.
  • In case of non-response, alternative audit procedure shall be performed to obtain reliable and relevant audit evidence.
  • Positive confirmation response request should be sought only when alternative audit procedures will not obtain audit evidence required. If the auditor does not receive such confirmation its implication on audit and auditor’s opinion shall be evaluated.
  • The auditor shall not use response to any negative confirmation request as the sole substantive audit procedure to address assessed risk of a material misstatement.

Secretarial Audit Compliance Management and Due Diligence ICSI Study Material