Patni Computer Systems

1 Contingent liabilities and capital commitments
 
                                                2008               2007
 
 Estimated amount of contracts remaining 
 to be executed on capital account and 
 not provided for                             2,442,808        1,316,119
 Foreign currency forward contracts          14,164,407        6,815,412
 Foreign currency option contracts            5,579,879        3,601,040
 Unamortised income in respect of foreign 
 currency forward contracts                       -               62,521
 Bank guarantees                                 55,838          152,036
 Letters of credit                                -               58,019
 Tax contingency                              2,482,297          891,869
 
 Estimated amount of contracts remaining to be executed on capital
 account and not provided for includes cases wherein purchase orders
 have been released and work has either not commenced or has been
 partially completed.
 
 Foreign currency forward contracts and forward currency options
 represents the total notional value of such contracts outstanding as at
 the balance sheet date.
 
 In December 2006, the Company received a demand notice from the Indian
 Income Tax department of approximately Rs. 630,166, including an
 interest demand of approximately Rs. 186,850 for the assessment year
 2004-05. The tax demand was mainly on account of disallowance of
 deduction claimed by the Company under Section 10A of the Income Tax
 Act, 1961, in respect of profits earned by its various eligible
 undertakings. Section 10A of Indian Income Tax Act exempts the profits
 earned by an undertaking for the export of computer software upon the
 fulfilment of certain conditions. One of the conditions is that the
 unit should not have been formed by the splitting up of an existing
 business.  The Company had only expanded its software development
 business whereas the Income Tax department contended that the business
 of the new units comprised of business transferred from existing units
 by splitting them. The Company, in consultation with its tax advisers,
 filed an appeal in January 2007 challenging the disallowance.
 
 One of the requirements under the Indian Income Tax Rules to proceed
 with an appeal is to deposit, either immediately or through monthly
 installments, a sum equivalent to 50% of the amount that is under
 appeal. Until 31 March 2008, the Company deposited a sum of Rs.
 310,280. Considering the facts and nature of disallowances and based on
 the advice given by the Companys legal counsel, management concluded
 that the disallowance was not tenable and a favorable outcome was
 expected in appeal proceedings and hence no provision for such income
 tax demand was considered necessary.
 
 Subsequently, in February 2008, the Company received an order from the
 Commissioner Income Tax (CIT) (Appeals) in favor of the Company by
 allowing the claim under Section 10A. The Company received the refund
 of the taxes paid after adjustment of the new demand for the assessment
 year 2002-03.
 
 2 Contingent liabilities and capital commitments (Contd.)
 
 In December 2007, the Company received another demand, of Rs. 261,703
 including an interest demand of approximately Rs. 139,880 for the
 assessment year 2002-03. The new demand concerns the same issue of
 disallowance of tax benefits under Section 10A. In the opinion of
 management, and based on advice received, the demand was not considered
 tenable against the Company and the Company had filed an appeal with
 the appellate authority.
 
 Subsequently, in March 2008, the Company received an order from the CIT
 (Appeals) in favor of the Company by allowing the claim under Section
 10A. The total amount paid till March 2008 of Rs. 261,703 along with
 interest has been received as refund.
 
 The Indian Income tax department has appealed against the CIT
 (Appeal’s) order in respect of assessment year 2002-03 and 2004-05 in
 the tribunal.
 
 In December 2008 the Company received a Demand of approximately Rs.
 458,665 for the Assessment Year 2003-04 including an interest demand of
 Rs. 258,644 and another Demand in January 2009 of approximately Rs.
 1,131,763 for the Assessment Year 2005-06 including an interest demand
 of approximately Rs. 421,972. These new demands concerns the same issue
 of disallowance of tax benefits under Section 10A. The Company has
 filed an Appeal with the tax authorities and stay of demand has been
 granted till 30 June 2009. The Company is required to pay only 10% of
 the amount under appeal before March 2009. Management considers these
 demands as not tenable against the Company and, therefore, no provision
 for this tax contingency has been established.
 
 Certain other income tax related legal proceedings are pending against
 the company. Potential liabilities, if any, have been adequately
 provided for, and the Company does not currently estimate any
 incremental liability in respect of these proceedings. Additionally,
 the Company is also involved in lawsuits and claims which arise in the
 ordinary course of business. There are no such matters pending that the
 Company expects to be material in relation to its business.
 
 3 Employee stock compensation plans
 
 On 30 June 2003, Patni established the Patni ESOP 2003 plan (the
 plan). Under the plan, the Company is authorised to issue up to
 11,142,085 equity shares to eligible employees. Employees covered by
 the Plan are granted an option, which may be based on service and
 performance criteria, to purchase shares of the Company subject to the
 requirements of vesting. The options vest in a graded manner over four
 years with 25 percent of the options vesting at the end of each year
 and expire at the end of 5 years from the date of vesting. A
 compensation committee constituted by the Board of directors of the
 Company administers the plan. The plan has been amended to enable the
 Company to issue upto 2,000,000 ADR linked options (wherein one ADR
 linked option is equal to two equity shares) to the employees of the
 Company as well as its subsidiaries and hence Patni ESOP 2003 -
 Revised 2006 has come into force with effect from 21 June 2006.
 
 On 29 April 2008, the Board of Directors of the Company approved the
 proposal to modify the option terms of Patni ESOP 2003- Revised 2006
 plan by reducing the number of options granted as well as the exercise
 price to Rs. 2 per share. This proposal required the approval of the
 shareholders through a special resolution in the Annual General Meeting
 of the Company. The approval of the shareholders was received at the
 Annual General Meeting held on 26 June 2008 enabling the management to
 modify the terms of Patni ESOP 2003 - Revised 2006 plan.
 
 The management deferred the implementation of the modification of
 options program as approved by the shareholders at Annual General
 Meeting post buyback, since Securities and Exchange Board of India
 (SEBI) had laid down restrictions on modifications of options/grants
 during buyback process. However post the completion of buy back of
 shares, the market price of the shares have reduced substantially as
 compared to the grant price, as a result the reduced proportion of
 grants would not benefit the employees as desired at the time of
 approval of the proposal.  Hence the management has stalled the
 proposal of modification as on date.
 
 The exercise price of the grant approximated the fair value of the
 underlying equity shares at the date of the grant, except in the case
 of restricted stock units, where in the exercise price for the grants
 offered to employees is at face value of the share price.
 
 4 Amounts due to micro, small and medium enterprises
 
 As at 31 December 2008, the company has no outstanding dues to any
 vendors registered with appropriate authority under the Micro, Small
 and Medium Enterprises Development Act, 2006. There have been no delays
 in settlement of dues to such vendors, warranting any payment of
 interest as provided in the above Act (2007 : Nil).
 
 5 Supplementary statutory information 
 
 i) Managerial remuneration
 
 a) Managerial remuneration does not include Rs. 140,454 (including
 pension provision Rs. 68,508 and leave provision Rs. 29,475); (2007:
 Rs. 50,386, including provision for pension : Rs. 10,652) paid/accrued
 to manager by the subsidiary company during the year ended 31 December
 2008.
 
 b) Sitting fees paid to non executive directors not included above
 aggregated Rs. 940 (2007: Rs. 900) during the year ended 31 December
 2008.
 
 c) Commission expense in respect of Non-Executive directors not
 included above aggregated Rs. 33,966 (2007: Rs. 15,442).
 
 d) Executive Directors, Mr. Gajendra K. Patni and Mr. Ashok K. Patni,
 under contract until 22 October 2010, ceased to be Executive Directors
 effective 1 October 2007 to become founder-directors. Termination
 benefit payments amounting to Rs. 77,908 have been included in Salaries
 and allowances as indicated above in note 28(i) for the year 2007.
 
 e) Computation of Net profit in accordance with Section 349 of the
 Companies Act, 1956, and calculation of commission payable to non-
 whole time directors:
 
 6 Change in estimates
 
 During the year ended 31 December 2008, the US Internal Revenue Service
 (IRS) completed its assessment of tax returns for the years ended 31
 March 2003, 2004 and 2005 of the US branch of the Company. Based on the
 completion of assessment of these years, the Company reviewed the
 adequacy of the previously established tax exposure reserves with
 respect to these years and re-measured the established tax positions
 for later years based on the experience gained from the tax examination
 and accordingly, the following amounts have been included
 
 7 Employee Benefit Plans
 
 The Company adopted Accounting standard 15 (revised 2005) – Employee
 benefits (“AS 15”) from 1 January 2007. Pursuant to the adoption, the
 transitional obligations of the Company amounted to Rs. 6,914 (net of
 tax). In accordance with AS-15, such liability has been adjusted
 (reduction) from the balance in the Profit & Loss Account as of 1
 January, 2007.
 
 Gratuity Benefits
 
 In accordance with the Payment of Gratuity Act, 1972, Patni provides
 for gratuity, a defined retirement plan covering all employees. The
 plan provides a lump sum payment to vested employees at retirement or
 termination of employment based on the respective employees defined
 portion of last salary and the years of employment with the Company.
 
 Patni contributes each year to a gratuity fund based upon actuarial
 valuations performed by an actuary. The fund is administered by Patni
 through a trust set up for the purpose. All assets of the plan are
 owned by the Trust and comprise of approved debt and other securities
 and deposits with banks.
 
 Pension Benefits
 
 Founder Directors of the Company are entitled to receive pension
 benefits upon retirement or termination from employment at the rate of
 50% of their last drawn monthly salary. The pension is payable from the
 time the eligible director reaches the age of sixty five and is payable
 to the directors or the surviving spouse. The liabilities for these
 pension plans are actuarially determined and periodically recognised.
 The plan is not funded.
 
 8 During the year 2006, a provision for income taxes of Rs. 299,596
 was made for fiscal years ended March 2001 and March 2002, as amount
 reimbursable by the Company to its US subsidiary due to delinquency in
 the Tax Return filing by the US branch of the Company.
 
 On assessment of the amount taxable in the hands of the subsidiary, Rs.
 43,351 representing interest component in the above provision has been
 reversed in 2007, as not payable to the subsidiary and has been treated
 as a prior period item.
 
 9 Mr. Louis Theodoor van den Boog was appointed as an Executive
 Director with effect from 29 April 2008. The appointment was subject to
 the approval of our shareholders at the annual general meeting and also
 subject to approvals of the statutory authorities including the Central
 Government under Section 269 of the Indian Companies Act,and other
 applicable provisions. The Shareholders approval has been received at
 the Annual General Meeting held on 26 June 2008. Subsequently, the
 Company has applied to the Central Government on 16 July 2008 for
 necessary approvals that Mr. Louis Theodoor van den Boog will be an
 Executive Director of the Company until 31 March 2013 unless extended
 by the Board with his consent. As of 31 December 2008, the Company has
 not received approval from the Central Government.
 
 10 Prior year comparatives
 
 Previous year figures have been appropriately reclassified to conform
 to the current years presentations.