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Notes to Accounts of Xchanging Solutions Ltd.

Dec 31, 2015

Notes:

(a) The above contingent liabilities are possible obligation or present obligation that may (but probably will not) require an outflow of resources.

(b) Represents various income tax demands under appeal.

(c) Represents service tax amount on select categories of transactions relating to financial years 2007-08 to 2011-12 set out in a show cause notice issued by the Commissioner of Service Tax, Bangalore, which is responded by the Company. Based on consultation with legal counsel, the Company has filed a formal reply to the show cause notice.

(d) It is not practicable for the Company to estimate the timings of cash outflows, if any, in respect of the above pending resolution of the respective proceedings.

(e) The Company does not expect any reimbursements in respect of the above contingent liabilities.

1. The Company has strategic gross investment amounting to Rs. 11,224 (2014: Rs. 11,224) in Exchanging Solutions (USA) Inc, USA, its wholly owned subsidiary. Based on assessment of diminution in the value of investments and evaluation of recoverability of other balances, the Company has made a provision of Rs. 6,045 (2014: Rs. 6,045) in prior years against the investments towards diminution in value considering it to be “a decline other than temporary” and Rs. 17,283 (2014: Rs. 17,283) in prior years against the loans and advances considering it to be doubtful of recovery. The Company has also tested the investments for impairment using cash flow forecasts based on approved budgets by board of ultimate holding Company and using a discounted cash flow method. As at the year end, the Company considers Exchanging Solutions (USA) Inc as a strategic long term investment and based on future growth projections, in the opinion of the management, the remaining value of the investments is not impaired. Further, the Company has granted loans and advances aggregating to Rs. 17,283 (2014: Rs. 17,283) and also has receivables (net of payables and provision) from the subsidiary amounting to Rs. 1,420 (2014: Rs. 1,214). Based on the aforesaid evaluation of recoverability, the net receivables is considered good and recoverable.

2 The Company has strategic gross investments amounting to Rs. 2,222 (2014: Rs. 2,222) in Exchanging Solutions (Europe) Limited, UK, its wholly owned subsidiary. Based on assessment of diminution in the value of investments and evaluation of recoverability of other balances, the Company has made a provision of Rs. 2,222 (2014: Rs. 2,222) in prior years against the investments towards diminution in value considering it to be “a decline other than temporary”. The Company tests its investment for impairment using cash flow forecasts based on approved budgets by using a discounted cash flow method. Result of such analysis in the current year does not require any change in the assessment from the previous year. Further, the Company also has payables to the subsidiary amounting to Rs. 45 (2014: receivables (net of payables and provision) Rs. 1,163).

3 On August 1, 2002, the Company issued 1,500,000, 11% debentures of face value of Rs. 100 each. The debentures were repayable at par at the end of five years from the date of issuance. Based on the orders of the Debt Recovery Tribunal, the Company had issued duplicate debenture certificates for 625,000 debentures (which form a part of the said 1,500,000 debentures) in favour of a Bank in June 2007. These debentures were redeemed in June 2007 and the same was disclosed in the annual report for the year ending March 2007. In August 2007, a civil suit was filed against the Company before the Hon’ble Madras High Court by another Company (“Third Party”), claiming rights over the said 625,000 debentures. Decision on this suit is still pending before Hon’ble Madras High Court. On the basis of an interim application filed by the Third Party, the Hon’ble High Court passed an Interim Order in September 2007 restraining the Company from reflecting the redemption of debentures and directing the Company to continue to show it as due and payable. The said Order was made absolute in December 2010. The Company, in consultation with a senior legal counsel, has filed an appeal on July 26, 2011 against the interim order of the Hon’ble High Court contending that it is not possible to show the debentures as due and payable as the debentures have already been redeemed and also reflected as redeemed in the Company’s financial statements prior to passing of interim order. The Company is awaiting the decision of the Hon’ble High Court on the Company’s appeal; pending which, no adjustment has been made in the financial statements.

4 SEGMENT REPORTING

The accounting policies adopted for segment reporting are in conformity with the accounting policies adopted for the Company. Revenue and expenses have been identified to segments on the basis of their relationship to the operating activities of the segment. Revenue and expenses, which relate to the Company as a whole and are not allocable to segments on a reasonable basis, is included as “Unallocated”. Segment assets includes all the assets except for deferred tax assets which are treated as unallowable.

The dominant source of risk and returns of the enterprise is considered to be the business in which it operates, viz. - Information Technology (IT) Services. The sub businesses are fully aligned to IT Services business of the Company and the same are being viewed by the management as a single business segment. Being a single business segment company, no primary segment information is being provided.

5 LEASES

Operating lease

As lessee:

In case of assets taken on lease:

The Company has operating lease arrangements for its office premises, guest houses and certain equipments. The lease arrangements for premises and guest houses have been entered up to a maximum of six years from the respective dates of inception. Some of these lease arrangements have price escalation clauses. Rent and hire charges for such operating leases recognized in the Statement of Profit and Loss for the year ended December 31, 2015 amounts to Rs.419 (2014: Rs. 393).

6 TRANSFER PRICING

The Company has carried out international and domestic transactions with associated enterprises. The Company appoints independent consultants to conduct a Transfer Pricing Study to determine whether the transactions with associated enterprises undertaken during the period are on an “arms length basis”. For the current year, the transfer pricing study shall be completed within the permissible time under the legislation and adjustments, if any, arising from the transfer pricing study shall be accounted for as and when the study is completed. However, the Management is confident that its international and domestic transactions with associated enterprises are at arm’s length so that the aforesaid legislation/transactions will not have any material impact on the financial statements, particularly on the amount of tax expense and that of provision for taxation for the current year.

7 PREVIOUS YEAR FIGURES

Previous year figures have been reclassified to conform to this year’s classification.


Dec 31, 2014

1. GENERAL INFORMATION

Xchanging Solutions Limited (''the Company''), incorporated on February 1,2002, is an information technology (IT) services provider with operations in India and an international presence established through subsidiaries in USA, Singapore and the UK.

Pursuant to agreements, arrangements, amalgamations, etc. (with requisite approvals from various High Courts in India, wherever applicable), the Company has, during earlier years, acquired the IT services businesses (including assets and liabilities) of / from the following entities:

* SSI Limited (Information Technology division with operations in India, USA and several other countries).

* Scandent Group Limited, Mauritius (with operations in USA, Singapore, Germany, etc.).

* Matrix One India Limited (with operations in India).

Pursuant to share purchase agreements between erstwhile principal shareholders of the Company and Xchanging (Mauritius) Limited (XML), a wholly owned subsidiary of Xchanging Plc, a listed company incorporated in UK, and consequent open offer to public, XML now owns 75.00% (2013: 75.00%) of the outstanding share capital of the Company. Though the open offer process was completed on April 9, 2009, XML obtained the power of operational control of the Company effective January 1,2009.

Pursuant to approval of the shareholders in the annual general meeting and subsequent approval of the Registrar of Companies on June 11,2012, the name of the Company has been changed to Xchanging Solutions Limited (formerly, Cambridge Solutions Limited).

a) Rights, preferences and restrictions attached to shares

Equity Shares: The Company has one class of equity shares having a par value of Rs.10 per share. Each shareholder is eligible for one vote per share held. In the event of liquidation, the equity shareholders are eligible to receive the remaining assets of the Company after distribution of all preferential amounts, in proportion to their shareholding.

b) Pursuant to SSI Limited (Information Technology division) merger scheme, the share capital of the erstwhile Scandent Holding Mauritius Limited as at March 31, 2004 was reduced from Rs.3,284 (2013: Rs.3,284) to Rs.1,316 (2013: Rs.1,316) and the capital reduction of Rs.1,968 (2013: Rs.1,968) was utilised to adjust the debit balance of equivalent amount in the Statement of Profit and Loss of the Company as at March 31,2004.

c) Reduction of Share Capital

The Board of Directors in their meeting held on February 27, 2015 had approved the proposed reduction of Share Capital so as to reduce the fully paid-up face value of equity shares from Rs 10/- per share to Rs 5/- per share, subject to the approval of the Members and the Hon''ble Karnataka High Court. Pursuant to the scheme of reduction of share capital u/s 100 to 104 of the Companies Act, 1956 and after obtaining required approvals, the proposed Capital Reduction would result in the paid-up share capital of the Company being reduced from Rs.1,114,037,160 (Rupees one hundred and eleven crores forty lakhs thirty seven thousand one hundred and sixty only) comprising of 111,403,716 (eleven crores fourteen lakhs three thousand seven hundred and sixteen) equity shares of Rs. 10/- (Rupees Ten) each fully paid up to Rs.557,018,580 (Rupees Fifty Five Crore Seventy Lakhs Eighteen Thousand Five Hundred and Eighty Only) comprising of 111,403,716 (eleven crores fourteen lakhs three thousand seven hundred and sixteen) equity shares of Rs. 5/- (Rupees Five) each fully paid up.The proposed capital reduction is to compensate the shareholders by return of cash on their investment.

As at Dec 31, 2014 Dec 31, 2013

2. CONTINGENT LIABILITIES (Refer Note 2.15)

(i) Bank guarantees 127 135

(ii) Claims against the Company not acknowledged as debts:

Income tax matters [Note (b)] 2,128 2,060

Service tax matters [Note (c)] 2,359 2,359 4,614 4,554

(iii) In the ordinary course of business, the Company is subject to legal proceedings, claims and litigation. Xchanging Solutions Limited and its USA subsidiary, Xchanging Solution USA Inc.,("XSUI") is currently a defendant in a claim for an unspecified amount alleging a breach of warranties in the USA. The claim in question relates to a contract that was awarded to XSUI in 2006 and was subsequently sold by XSUI in 2007 to the claimant. The litigation is a fact intensive case for which the fact discovery and proceedings are ongoing in USA. Based on the facts produced and reviewed to date and legal advice thereon, the Company believes it is not probable that the claim will be successful or result in a material impact on the financial statements. Therefore, no provision is required to be made at this stage.

Notes:

(a) The above contingent liabilities are possible obligation or present obligation that may (but probably will not) require an outflow of resources.

(b) Represents various income tax demands under appeal.

(c) Represents service tax amount on select categories of transactions relating to financial years 2007-08 to 2011-12 set out in a show cause notice issued by the Commissioner of Service Tax, Bangalore, which is responded by the Company. Based on consultation with legal counsel, the Company has filed a formal reply to the show cause notice.

(d) It is not practicable for the Company to estimate the timings of cash outflows, if any, in respect of the above pending resolution of the respective proceedings.

(e) The Company does not expect any reimbursements in respect of the above contingent liabilities.

(f) Defined Contribution Plans

Provident Fund and Other Funds: During the year, the Company has recognised Rs. 341 (2013: Rs. 284) in the Statement of Profit and Loss relating to provident fund and other funds, which is included in the ''Contribution to provident and other funds''.

(j) Defined Benefit Plan

Gratuity (unfunded): The Company provides for gratuity, a defined benefit plan (the "gratuity plan") covering eligible employees in accordance with the Payment of Gratuity Act, 1972. The gratuity plan provides a lump sum payment to vested employees at retirement or termination of employment based on the respective employee''s last drawn salary and years of employment with the Company.

The following tables summarise the components of expense recognised in the Statement of Profit and Loss and amounts recognised in the Balance Sheet for the gratuity plan:

b) During the year, the Company has recognised employee benefits expense amounting to Rs. NIL (2013: Rs. 3) on account of cross charge of ''Stock Options and Stock Incentive Plan'' related cost as per the agreement entered into between certain employees of the Company and the Ultimate Holding Company (Xchanging plc, UK). This stock option scheme of Xchanging plc, UK is being managed and run by Xchanging plc, UK. Accordingly, other detailed disclosures required by the Guidance Note on ''Accounting for Employee Share-based Payments'' issued by Institute of Chartered Accountants of India have not been made, as these do not pertain to information relating to the Company and such information is not available with the Company.

3. The Company has strategic gross investment amounting to Rs. 11,224 (2013: Rs. 11,224) in Xchanging Solutions (USA) Inc, USA, its wholly owned subsidiary. Based on assessment of diminution in the value of investments, the Company has made a provision of Rs. 6,045 (2013: Rs. 6,045) in prior years against the investments towards diminution in value considering it to be "a decline other than temporary" and Rs. 17,283 (2013: Rs. 17,283) in prior years against the loans and advances considering it to be doubtful of recovery. The Company has also tested the investments for impairment using cash flow forecasts based on approved budgets by Board of ultimate holding Company and using a discounted cash flow method. As at the year end, the Company considers Xchanging Solutions (USA) Inc as a strategic long term investment and based on future growth projections, in the opinion of the management, the remaining value of the investments is not impaired. Further, the Company has granted loans and advances aggregating to Rs. 17,283 (2013: Rs. 17,283) and also has receivables (net of payables and provision) from the subsidiary amounting to Rs. 1,214 (2013: Rs. 1,696). Based on the evaluation of recoverability, the net receivables is considered good and recoverable.

4. The Company has strategic gross investments amounting to Rs. 2,222 (2013: Rs. 2,222) in Xchanging Solutions (Europe) Limited, UK, its wholly owned subsidiary. Based on assessment of diminution in the value of investments, the Company has made a provision of Rs. 1,534 (2013: Rs. 1,534) in prior years against the investments towards diminution in value considering it to be "a decline other than temporary". The Company has also tested the investments for impairment using cash flow forecasts based on approved budgets by Board of ultimate holding Company and using a discounted cash flow method. As a result of this assessment, during the year the company has created additional provision of Rs 688. With the additional provision, the value of investment Rs. 2,222 in Xchanging Solutions (Europe) Limited, UK is fully impaired as at the year end. Further, the Company also has receivables (net of payables and provision) from the subsidiary amounting to Rs. 1,163 (2013: Rs. 869). Based on the evaluation of recoverability, the net receivables is considered good and recoverable.

5. On August 1, 2002, the Company issued 1,500,000, 11% debentures of face value of Rs. 100 each. The debentures were repayable at par at the end of five years from the date of issuance. Based on the orders of the Debt Recovery Tribunal, the Company had issued duplicate debenture certificates for 625,000 debentures (which form a part of the said 1,500,000 debentures) in favour of a Bank in June 2007. These debentures were redeemed in June 2007 and the same was disclosed in the annual report for the year ending March 2007. In August 2007, a civil suit was filed against the Company before the Hon''ble Madras High Court by another Company ("Third Party"), claiming rights over the said 625,000 debentures. Decision on this suit is still pending before Hon''ble Madras High Court. On the basis of an interim application filed by the Third Party, the Hon''ble High Court passed an Interim Order in September 2007 restraining the Company from reflecting the redemption of debentures and directing the Company to continue to show it as due and payable. The said Order was made absolute in December 2010. The Company, in consultation with a senior legal counsel, has filed an appeal on July 26, 2011 against the interim order of the Hon''ble High Court contending that it is not possible to show the debentures as due and payable as the debentures have already been redeemed and also reflected as redeemed in the Company''s financial statements prior to passing of interim order. The Company is awaiting the decision of the Hon''ble High Court on the Company''s appeal; pending which, no adjustment has been made in the financial statements.

6. Related Party Disclosures

A. Names of related parties and nature of relationship:

1) Parties where control exists: Nature of relationship Names of related parties

(i) Holding companies:

Ultimate Holding Company Xchanging plc, UK Intermediate holding companies Xchanging Holdings Limited, UK

Xchanging BV, The Netherlands

Immediate holding company Xchanging (Mauritius) Limited, Mauritius (''XML'')

(ii) Subsidiary companies Xchanging Solutions (Europe) Limited, UK (''XSEL'')

Xchanging Solutions (Singapore) Pte Limited, Singapore (''XSSPL'')

Xchanging Solutions (Malaysia) Sdn Bhd, Malaysia (''XSMSB'')

Xchanging Solutions (USA) Inc, USA (''XSUI'')

Nexplicit Infotech India Private Limited, India (''NIIPL'')

(iii) Key Managerial Personnel (KMP)

Executive Chairman and Chief Kenneth Lever(upto November7,2014) Executive Officer

Non Executive Director & David Bauernfeind ( Executive Chairman Director upto November 7, 2014 and Non Executive Director & Chairman from November 8, 2014)

Executive Director & Chief Alok K Sinha (from November 7, Executive Officer 2014)

2) Other Related Parties with whom transactions have taken place during the year:

(i) Fellow subsidiaries Xchanging Integrated Services Victoria Pty Limited, Australia (''XISVPL'')

Xchanging Integrated Services Australia Pty Limited, Australia (''XISAPL'')

Xchanging Builders (India) Private Limited, India (''XBPL'') Xchanging Systems and Service Inc., USA (''XSSI'')

Xchanging Global Insurance Solutions Ltd., UK (''XGISL'')

Xchanging Technology Services India Private Limited, India (''XTSIPL'')

Xchanging UK Limited, UK (''XUKL'')

Xchanging Asia Pacific Sdn Bhd, Malaysia (''XAPSB'')

Xchanging Procurement Services Limited, UK (''XPSL'')

Ferguson Snell & Associates Ltd. UK (''FSAL'')

Xchanging Inc. USA (''XI'')

Xchanging PTY Limited, Australia (''XPL'')

Ins-sure Services Ltd. UK (''ISL'')

SBB Services Inc. USA (''SBB'')

Xchanging Procurement Services Europe SAS, France ( ''XPSLF'')

7. Leases

Operating lease

As lessee:

In case of assets taken on lease:

The Company has operating lease arrangements for its office premises, guest houses and certain equipments. The lease arrangements for premises and guest houses have been entered up to a maximum of six years from the respective dates of inception. Some of these lease arrangements have price escalation clauses. Rent and hire charges for such operating leases recognised in the Statement of Profit and Loss for the year ended December 31,2014 amounts to Rs. 393 (2013: Rs. 332).

8. Taxation

a) Deferred Tax Assets:

During the year, the Company has reassessed unrecognised deferred tax assets and has recognised deferred tax for timing differences to the extent there is a reasonable certainty that sufficient taxable income will be available against which such deferred tax assets can be realised as envisaged under AS22 "Accounting for Taxes on Income".

b) Transfer Pricing:

The Company has carried out international and domestic transactions with associated enterprises. The Company appoints independent consultants to conduct a Transfer Pricing Study to determine whether the transactions with associated enterprises undertaken during the period are on an "arms length basis". For the current year, the transfer pricing study shall be completed within the permissible time under the legislation and adjustments, if any, arising from the transfer pricing study shall be accounted for as and when the study is completed. However, the Management is confident that its international and domestic transactions with associated enterprises are at arm''s length so that the aforesaid legislation/transactions will not have any material impact on the financial statements, particularly on the amount of tax expense and that of provision for taxation for the current year.

9. Previous Year Figures

Previous year figures have been reclassified to conform to this year''s classification.


Dec 31, 2013

1. CONTINGENT LIABILITIES

(i) Bank guarantees 135 4

(ii) Claims against the Company not acknowledged as debts:

Income tax matters [Note (b)] 2,060 1,403

Service tax matters [Note (c)] 2,359 2,359

4,554 3,766

Notes:

(a) The above contingent liabilities are possible obligation or present obligation that may (but probably will not) require an outflow of resources.

(b) Represents various income tax demands under appeal.

(c) Represents service tax amount on select categories of transactions relating to financial years 2007-08 to 2011-12 set out in a show cause notice issued by the Commissioner of Service Tax, Bangalore, which is disputed by the Company. Based on consultation with legal counsel, the Company has filed a formal reply to the show cause notice.

(d) It is not practicable for the Company to estimate the timings of cash outflows, if any, in respect of the above pending resolution of the respective proceedings.

(e) The Company does not expect any reimbursements in respect of the above contingent liabilities.

2. The Company has strategic gross investment amounting to Rs. 11,224 (2012: Rs. 11,224) in Xchanging Solutions (USA) Inc, USA, its wholly owned subsidiary. Further, the Company has granted loans and advances aggregating to Rs. 17,283 (2012: Rs. 17,283) and also has receivables (net of payables and provision) from the subsidiary amounting to Rs. 1,696 (2012: Rs. 2,058). Based on assessment of diminution in the value of investments and evaluation of recoverability of other balances, the Company has made a provision of Rs. 6,045 in prior years against the investments towards diminution in value considering it to be "a decline other than temporary" and Rs. 17,283 in prior years against the loans and advances considering it to be doubtful of recovery. The Company has also tested the investments for impairment using cash flow forecasts based on approved budgets and using a discounted cash flow method. As at the year end, the Company considers Xchanging Solutions (USA) Inc as a strategic long term investment and based on future growth projections, in the opinion of the management, the remaining value of the investments is not impaired. Further, based on the aforesaid evaluation of recoverability, the entire receivables is considered good and recoverable.

3. The Company has strategic gross investments amounting to Rs. 2,222 (2012: Rs. 2,222) in Xchanging Solutions (Europe) Limited, UK, its wholly owned subsidiary. Based on assessment of diminution in the value of investments, the Company has made a provision of Rs. 1,534 in prior years considering it to be "a decline other than temporary". The Company has also tested the investments for impairment using cash flow forecasts based on approved budgets and using a discounted cash flow method. As at the year end, the Company considers Xchanging Solutions (Europe) Limited as a strategic long term investment and based on future growth projections, in the opinion of the management, the remaining value of the investments is not impaired.

4. On 1 August 2002, the Company issued 1,500,000, 11% debentures of face value of Rs. 100 each. The debentures were repayable at par at the end of five years from the date of issuance. Based on the orders of the Debt Recovery Tribunal, the Company had issued duplicate debenture certifcates for 625,000 debentures (which form a part of the said 1,500,000 debentures) in favor of a Bank in June 2007. These debentures were redeemed in June 2007 and the same was disclosed in the annual report for the year ending March 2007. In August 2007, a civil suit was filed against the Company before the Hon''ble Madras High Court by another company ("Third Party"), claiming rights over the said 625,000 debentures. Decision on this suit is still pending before Hon''ble Madras High Court. On the basis of an interim application fled by the Third Party, the Hon''ble High Court passed an Interim Order in September 2007 restraining the Company from reflecting the redemption of debentures and directing the Company to continue to show it as due and payable. The said Order was made absolute in December 2010. The Company, in consultation with a senior legal counsel, has fled an appeal against the interim order of the Hon''ble High Court contending that it is not possible to show the debentures as due and payable as the debentures have already been redeemed and also refected as redeemed in the Company''s accounts prior to passing of interim order. The Company is awaiting the decision of the Hon''ble High Court in the Company''s appeal; pending which, no adjustment has been made in the accounts.

5. Related Party Disclosures

A. Names of related parties and nature of relationship:**

Nature of relationship Names of related parties

Parties where control exists:

(i) Holding companies:

Ultimate Holding Company Xchanging plc, UK

Intermediate holding companies Xchanging Holdings Limited, UK

Xchanging BV, The Netherlands Immediate holding company

Xchanging (Mauritius) Limited, Mauritius (''XML'')

(ii) Subsidiary companies Xchanging Solutions (Europe) Limited UK (''XSEL'')

Xchanging Solutions (Singapore) Pte Limited, Singapore (''XSSPL'')

Xchanging Solutions (Malaysia) Sdn Bhd, Malaysia (''XSMSB'')

Xchanging Solutions (USA) Inc, USA (''XSUI'')

Cambridge Solutions Pty Limited, Australia (''CSPL'') (upto March 20, 2012)

Nexplicit Infotech India Private Limited, India (''NIIPL'')

Parties under common control with whom transactions have taken place:

Fellow Subsidiaries Xchanging Integrated Services Victoria Pty Limited, Australia (''XISVPL'')

Xchanging Integrated Services Australia Pty Limited, Australia (''XISAPL'')

Xchanging Builders (India) Private Limited, India (''XBPL'')

Xchanging Systems and Service Inc., USA (''XSSI'')

Xchanging Global Insurance Solutions Ltd., UK (''XGISL'')

Xchanging Technology Services India Private Limited, India (''XTSIPL'')

Xchanging UK Limited, UK (''XUKL'')

Xchanging Asia Pacifc Sdn Bhd, Malaysia (''XAPSB'')

Xchanging HR Services Ltd, UK (''XHRSL'') (*)

Xchanging Procurement Services Limited, UK (''XPSL'')

Ferguson Snell & Associates Ltd, UK (''FSAL'')

Xchanging Inc. USA (''XI'')

Xchanging PTY Limited, Australia (''XPL'')

Key Managerial Personnel (KMP)

Executive Chairman and Chief

Executive Officer Kenneth Lever (*)

Executive Director David Bauernfeind (*)

(*) No transactions during the year.

** The above information and those in "(B) Summary of transactions with related parties" have been determined to the extent such parties have been identified by the management of the Company.

6. Leases

Operating lease

As lessee:

In case of assets taken on lease:

The Company has operating lease arrangements for its office premises, guest houses and certain equipments. The lease arrangements for premises and guest houses have been entered up to a maximum of six years from the respective dates of inception. Some of these lease arrangements have price escalation clauses. Rent and hire charges for such operating leases recognised in the Statement of Profit and Loss for the year ended December 31, 2013 amounts to Rs. 332 (2012: Rs. 432).

Notes:

(i) Provision for onerous lease contracts relates to losses recognised on contracts to the extent that unavoidable cost of meeting the obligations under the contract exceeds the economic benefits expected to be received under it. Pending settlement with the lessor, it is not possible to estimate the timings of the outflow.

(ii) Provision for litigation relates to a litigation matter. Due to the very nature of such costs, it is not possible to estimate the timing/uncertainties relating to their outflows.

(iii) Prior year numbers are disclosed within brackets.

7. Dues to micro, small and medium enterprises (MSMED)

Based on the information available to date, the Company has identified no vendors that qualify under the requirements of the Micro, Small and Medium Enterprises Development Act, 2006 (''MSMED'').

8. Taxation

a) Current Tax:

Current tax charge reflects provision for income tax based on the taxable income of the Company after considering taxable income as per the local tax laws applicable in India. While ascertaining the taxable income for the current year, the brought forward losses if any, have also been considered.

The current tax charge for the Company includes minimum alternative tax (MAT) determined under Section 115JB of the Income Tax Act, 1961, of India.

Provision for income tax has been computed by applying the Income Tax Act, 1961 to the profit for the financial year ended December 31, 2013, although the actual tax liability of the Company has to be computed each year by reference to the taxable profit for each fiscal year ended March 31.

b) Deferred Tax Assets (Net):

During the year, the Company has reassessed unrecognised deferred tax assets and has recognised deferred tax for timing differences to the extent there is a reasonable certainty that sufficient taxable income will be available against which such deferred tax assets can be realised as envisaged under AS22 "Accounting for Taxes on Income".

c) Transfer Pricing:

The Company has significant intra group transactions pertaining to revenue and expense cross charges. The management is in the process of updating the transfer pricing study for such transactions entered into during the year ended December 31, 2013, and does not anticipate any adjustments with regard to the transactions involved.

Note:

(i) Prior year numbers are disclosed within brackets.

9. Previous Year Figures

Previous year figures have been reclassified to conform to this year''s classification.


Dec 31, 2012

1. GENERAL INFORMATION

Xchanging Solutions Limited (''the Company'') (formerly known as Cambridge Solutions Limited), incorporated on February 1, 2002, is an information technology (IT) services provider with operations in India and an international presence established through subsidiaries in several countries including the USA, Singapore and the UK. During the previous year the Company has sold its BPO business.

Pursuant to agreements, arrangements, amalgamations, etc. (with requisite approvals from various High Courts in India, whereverapplicable), the Company has, during earlieryears, acquired the IT services businesses (including assets and liabilities) of/ from the following entities:

- SSI Limited (Information Technology division with operations in India, USA and several other countries).

- Scandent Group Limited, Mauritius (with operations in USA, Singapore, Germany, etc.).

- Matrix One India Limited (with operations in India).

Pursuant to share purchase agreements between Xchanging (Mauritius) Limited (XML), a wholly owned subsidiary of Xchanging Plc, a listed company incorporated in UK, and the erstwhile principal shareholders ofthe Company, and consequent open offer to public, XML now owns 75.00% (2011: 75.62%) ofthe outstanding share capital ofthe Company. Though the open offer process was completed on April 9, 2009, XML obtained the power of operational control ofthe Company effective January 1, 2009.

On May 31, 2011, Cambridge Integrated Services Group Inc, USA (''CISGI''), a wholly owned subsidiary of the Company, entered into agreements with Sedgwick Claims Management Services, Inc, USA for the sale of virtually its entire operations of workers'' compensation and third party administration. Further, on August 31, 2011, the Company has sold its investment in CISGI to Waltham Holdings Limited, Jersey, Channel Islands, a fellow subsidiary.

On June 13, 2011, the Company entered into a Share Purchase Agreement with Xchanging Procurement Pty Limited, Australia, a fellow subsidiary, for sale of shares held by the Company in Cambridge Integrated Services Victoria Pty Ltd, Australia, a wholly owned subsidiary of the Company.

On June 16, 2011, the Company entered into a Business Transfer Agreement with Xchanging Technology Services India Private Limited, a fellow subsidiary, for sale of its India BPO business including its investments in Xchanging Builders (India) Private Limited, a wholly owned subsidiary of the Company.

Pursuant to the sale of the BPO businesses as explained above, the Company is nowfocused only on the business of IT services.

Pursuant to approval ofthe shareholders in the annual general meeting and subsequent approval ofthe Registrar ofCompanies on June 11, 2012, the name ofthe Company has been changed toXchanging Solutions Limited.

a) Rights, preferences and restrictions attached to shares

Equity Shares: The Company has one class of equity shares having a par value of Rs.10 per share. Each shareholder is eligible for one vote per share held. In the event of liquidation, the equity shareholders are eligible to receive the remaining assets of the Company after distribution of all preferential amounts, in proportion to their shareholding.

b) Pursuant to SSI Limited (Information Technology division) merger scheme, the share capital of the Company as at March 31, 2004 was reduced from Rs.3,284 (2011: Rs.3,284) to Rs.1,316 (2011: Rs.1,316) and the capital reduction of Rs.1,969 (2011: Rs.1,969) was utilised to adjust the debit balance of equivalent amount in the Statement of Profit and Loss ofthe Company as at March 31, 2004.

Nature of security and terms of repayment for secured borrowings are as follows:

a) Nature ofsecurity: Vehicles purchased on loan for employees

b) Terms of Repayment: Monthly payment of equated monthly instalments for a period of 3-5 years

c) Interest rate: 9.5% to 13.5%

Note: As at December 31, 2012, the entire loans and advances balance (including short term loan as per Note 18) of Rs. 17,971 (2011: Rs. 17,723) due from subsidiaries is interest free and repayable on demand. However, Management does not have an intention to recover these loans in the next 12 months and hence these have been classified under Long Term Loans and Advances.

Notes:

(i) Trade Receivable include unbilled revenue amounting Rs.401 (2011:Rs.487) under Others which are considered good.

(ii) Trade Receivable include unbilled revenue amounting to Rs.81 (2011:Rs.81) under Outstanding for a period exceeding six months which are considered doubtful and has been fully provided.

Notes:

(a) The above contingent liabilities are possible obligation or present obligation that may (but probably will not) require an outflow of resources.

(b) Relates to transfer pricing adjustment for arm''s length price by the assessing officer and other adjustments which are disputed by the Company, and the matter is lying under appeal with the Commissioner of Income-tax (Appeals), Bangalore. An amount of Rs.42 (2011:Rs.28) has been paid under protest against the demand.

(c) Relates to transfer pricing adjustment for arm''s length price by the assessing officer and other adjustments which are disputed by the Company. The matter is lying under appeal with the Commissioner of Income-tax (Appeals), Bangalore. An amount of Rs.921 (2011:Rs.821) has been paid under protest against the demand.

(d) Relates to certain tax adjustments arrived at by the assessing officer, which is disputed by the Company. An amount of Rs.113 (2011: Rs.75) has been paid under protest against the demand. The Company has filed an appeal with the Income Tax Appellate Tribunal, Bangalore in this regard.

(e) The assessing officer has made certain transfer pricing and other adjustments and accordingly raised a demand of Rs.72. Subsequently the assessing officer corrected the arithmetic errors in the order and reduced the demand to Nil. However, the Company disputes the income adjustments and has filed an appeal with the Income Tax Appellate Tribunal, Bangalore in this regard.

(f) Relates to withholding tax adjustments amounting to Rs.359 (2011: 359) arrived at by the assessing officer which is disputed by the Company, and the matter is lying under appeal with the Commissioner of Income-tax (Appeals), Bangalore. The Commissioner of Income- tax (Appeals) allowed the appeal during the year and referred the case back to the assessing officer. The final order from the assessing officer is awaited.

(g) The assessing officer has made certain transfer pricing adjustments of Rs.471. The adjustments have been set off against the brought forward losses resulting in demand of Nil (2011:Nil). However, the adjustments are disputed by the Company and an appeal has been filed with the Income Tax Appellate Tribunal, Bangalore in this regard.

(h) The Transfer Pricing Officer (TPO) has made, subsequent to the year end, certain transfer pricing adjustments of Rs.1,045. The final order is awaited from the assessing officer. The Company will file an appeal once the final assessement order is received.

(i) Relates to withholding tax adjustments amounting to Rs.85 (2011: 85) arrived at by the assessing officer which is disputed by the Company, and the matter is lying under appeal with the Commissioner of Income-tax (Appeals), Bangalore. The Commissioner of Income- tax (Appeals) allowed the appeal during the year and referred the case back to the assessing officer. The final order from the assessing officer is awaited.

(j) Relates to withholding tax adjustments arrived at by the assessing officer. The Company is in the process of rectifying the returns in order to nullify the demand.

(k) Represents service tax amount on select categories of transactions relating to financial years 2007-08 to 2011- 12 set out in a show cause notice issued by the Commission of Service Tax, Bangalore, which is disputed by the Company, and a formal reply to the show cause notice, based on consultation with legal counsel, is in the process of being filed.

(a) Defined Contribution Plans

Provident Fund: During the year, the Company has recognised Rs.253 (2011: Rs.441) in the Statement of Profit and Loss relating to defined contribution plans, which are included in the Contribution to Provident and otherfunds

(b) Defined Benefit Plan

Gratuity: The Company provides for gratuity, a defined benefit plan (the gratuity plan) to its employees in India. The gratuity plan provides a lump sum payment to vested employees at retirement or termination of employment based on the respective employee''s last drawn salary and years of employment with the Company.

The following tables summarise the components of net benefit expense recognised in the Statement of Profit and Loss and amounts recognised in the balance sheet for the gratuity plan.

Notes:

(i) The estimates of future increase in salary, considered in the actuarial valuation, have been taken on account of inflation, seniority, promotion and other relevant factors such as supply and demand in the employment market.

(ii) The discount rate is based on the prevailing market yields of Indian government securities as at the Balance Sheet date for the estimated term of the obligation.

(iii) The long term estimate ofthe expected rate of return on plan assets has been arrived at based on prevailing yields on those assets. Assumed rate of return on assets is expected to vary from year to year reflecting the returns on matching government bonds.

(c) In accordance with Accounting Standard 15 "Employee Benefits", the Company has been providing for compensated absences/ leave encashment based on valuation performed by an independent actuary. The Company has amended its leave policy that impacts the carry forward leave balance of employees, and carried out an actuarial valuation based on the amended leave policy, which has resulted in the reduction of provision by Rs. 206. This reduction has been treated as reversal of the provision on account of amendment to the leave policy and has been included under "Other income".

2 The Company has strategic gross investment amounting to Rs.11,225 (2011:Rs.11,225) in Xchanging Solutions (USA) Inc.,USA (formerly Cambridge Solutions & Services Inc.,USA) its wholly owned subsidiary. Further, the Company has granted loans and advances aggregating to Rs.17,283 (2011:Rs.17,283) and also has receivables (net of payables and provision) from the subsidiary amounting to Rs.2,198 (2011:Rs.2,729). Based on assessment of diminution in the value of investments and evaluation of recoverability of other balances, the Company, has made a provision of Rs.1,588 in the prior year against the investments towards diminution in value considering it to be "a decline other than temporary" and Rs.17,283 in the prior year against the loans and advances considering it to be doubtful of recovery. The Company has also tested the investment for impairment using cash flow forecasts based on approved budgets and using a discounted cash flow method. As at the year end, the Company considers Xchanging Solutions (USA) Inc. a strategic long term investment and based on future growth projections, in the opinion of the management, the remaining value of the investments is not impaired. Further, based on the aforesaid evaluation of recoverability, the entire receivables is considered good and recoverable.

3 The Company has strategic gross investments amounting to Rs.2,222 (2011:Rs.2,222) in Xchanging Solution Europe Limited (formerly Cambridge Solutions Europe Limited, UK), its wholly owned subsidiary. Based on assessment of diminution in the value of investments, the Company, has made a provision of Rs.1,534 in the prior year considering it to be "a decline other than temporary". The Company tested the investment for impairment using cash flow forecasts based on approved budgets and using a discounted cash flow method. As at the year end, the Company considers CSEL a strategic long term investment and based on future growth projections, in the opinion of the management, the remaining value ofthe investments is not impaired.

4 On August 1, 2002, the Company issued 1,500,000, 11% debentures of face value of Rs.100 each. The debentures were repayable at par at the end of five years from the date of issuance. Based on the orders ofthe Debt Recovery Tribunal, the Company had issued duplicate debenture certificates for 625,000 debentures (which form a part of the said 1,500,000 debentures) in favour of a Bank in June 2007. These debentures were redeemed in June 2007 and the same was disclosed in the annual report for the year ending March 2007. In August 2007, a civil suit was filed against the Company before the Hon''ble Madras High Court by another company ("Third Party"), claiming rights over the said 625,000 debentures. Decision on this suit is still pending before Hon''ble Madras High Court. On the basis of an interim application filed by the Third Party, the Hon''ble High Court passed an Interim Order in September 2007 restraining the Company from reflecting the redemption of debentures and directing the Company to continue to show it as due and payable. The said Order was made absolute in December 2010. The Company, in consultation with a senior legal counsel, has filed an appeal against the interim order of the Hon''ble High Court contending that it is not possible to show the debentures as due and payable as the debentures have already been redeemed and also reflected as redeemed in the Company''s accounts prior to passing of interim order. The Company is awaiting the decision ofthe Hon''ble High Court in the Company''s appeal, pending which; no adjustment has been made in the accounts.

5 The Company incurred losses in the prior year primarily on account of strategic initiatives including the sale of all its BPO businesses. The strategy led to significant, non-recurring and exceptional nature of items being recorded in the Statement of Profit and Loss in the previous year. Though the losses have been set off against free reserves, there is still a partial erosion of the net worth of the Company. However, considering the positive cash flow from operating activities along with negligible external debt and significant amount of cash on hand, and taking into consideration the approved budgets for the next twelve months, the Management and Board of Directors are of the opinion that it is appropriate to present these financial statements on a going concern basis.

6 Segment Reporting

The primary segment reporting of the Company is on the basis of business segments. Till the previous year the Company was organised into two business segments, viz., Information Technology and related services (''IT'') and Business Process Outsourcing (''BPO''). During the previous year, the Company has sold its BPO business. During the current year, the Company has only one business segment viz., IT. The segments have been identified and reported considering industry segments of customers, risks and returns, organisation structure and inter- nal financial reporting systems. Management views the entire IT business as one business segment.

The secondary segment reporting is performed on the basis of the geographical location of customers. The management views the USA, Europe (comprising France and UK) and rest ofthe world (comprising India, Australia and Singapore) as distinct geographical segments.

In 2011, Corporate activities such as treasury and taxation have been considered as unallocated items.

7 Leases

Operating lease

As lessee:

In case of assets taken on lease:

The Company has operating lease arrangements for its office premises, guest houses and certain equipment. The lease arrangements for premises and guest houses have been entered up to a maximum of six years from the respective dates of inception. Some of these lease arrangements have price escalation clauses. Rent and hire charges for such operating leases recognised in the Statement of Profit and Loss for the year ended December 31, 2012 amounts to Rs. 432 (2011: Rs. 1,032).

Notes:

(i) Provision for onerous lease contracts relates to losses recognised on contracts to the extent that unavoidable cost of meeting the obligations under the contract exceeds the economic benefits expected to be received under it. The cash outflows are expected to occur over a period of eight years.

(ii) Provision for litigations relates to a litigation matter. Due to the very nature of such costs, it is not possible to estimate the timing/ uncertainties relating to their outflows.

(iii) Prior year numbers are disclosed within brackets.

8 Dues to micro medium and small enterprises (MSMED)

The Company has initiated the process of identifying micro, small and medium enterprises as defined under the Micro, Small and Medium Enterprises DevelopmentAct, 2006 (''MSMED''), by requesting vendor confirmations, and as at the year end, the Company is still in the process of compiling the complete and relevant information. However, based on the information available to date, the Company has identified no vendors that qualify under the requirements of MSMED and accordingly, the below disclosures have been given considering vendor identification carried out as at the year end:

Notes:

(1) The Company has not accrued for interest on the unpaid principal amount as no claim has been raised by the concerned vendors.

(2) The above information has been determined to the extent such parties have been identified by the Company, which has been relied upon by the auditors.

9 Taxation Current Tax:

Current tax charge reflects provision for income tax based on the taxable income of the Company after considering taxable income as per the local tax laws applicable in India. While ascertaining the taxable income for the current year, the broughtforward losses ifany, have also been considered.

In India, the Company operates out of various facilities. Many of these facilities were eligible to claim tax holiday under Section 10A ofthe Income-tax Act, 1961,of India up to the tax fiscal year ended March 31,2011.

The current tax charge for the Company includes minimum alternative tax (MAT) determined under Section 115JB ofthe Income Tax Act, 1961, of India.

MAT Credit Entitlement:

Based on assessment of future taxable income and sunset of tax holiday period, the management is ofthe opinion that there is convincing evidence that the Company will pay normal income tax within the specified period during which MAT credit is available for set off. Loans and Advances includes MAT Credit Entitlement asset of Rs.1,260 (2011:Rs.1,260). MAT Credit Entitlement asset will be reviewed at each balance sheet date forwrite-down, if any.

Deferred tax:

In terms of the provisions of the AS-22 "Accounting for Taxes on Income", considering the accumulated business losses and unabsorbed depreciation, no deferred tax asset has been recognised in these financial statements by virtue of there being no virtual certainty supported by convincing evidence of future taxable income. However, this position will be reassessed at every year end.

Transfer Pricing:

The Company has significant intra group transactions pertaining to revenue and expense cross charges. The management is in the process of updating the transfer pricing study for such transactions entered into during the year ended December 31, 2012, and does not anticipate any adjustments with regard to the transactions involved.

10 Previous Year Figures

The financial statements for the year ended December 31, 2011 had been prepared as per the then applicable, pre-revised Schedule VI to the Companies Act, 1956. Consequent to the notification of Revised Schedule VI under the Companies Act, 1956, the financial statements for the year ended December 31, 2012 are prepared as per Revised Schedule VI. Accordingly, the previous year figures have also been reclassified to conform to this year''s classification. The adoption of Revised Schedule VI for previous year figures does not impact recognition and measurement principles followed for preparation offinancial statements.


Dec 31, 2010

1. BACKGROUND

Cambridge Solutions Limited (the Company), incorporated on February 1, 2002, is a business process outsourcing (BPO) and information technology (IT) services provider with operations in India and an international presence established through offices in several countries including the USA and Australia.

Pursuant to agreements, arrangements, amalgamations, etc. (with requisite approvals from various High Courts in India, wherever applicable), the Company has, during earlier years, acquired BPO and IT services businesses (including assets and liabilities) of / from following entities:

SSI Limited (Information Technology division with operations in India, USA and several other countries).

Scandent Group Limited, Mauritius (with operations in USA, Singapore, Germany, etc.).

Cambridge Services Holdings LLC, USA (with operations in USA and Australia).

Cambridge Integrated Services India Private Limited (with operations in India)

Matrix One India Limited (with operations in India)

Pursuant to share purchase agreements between Xchanging (Mauritius) Limited (XML), a wholly owned subsidiary of Xchanging Plc, a listed company incorporated in UK, and the erstwhile principal shareholders of the Company, and consequent open offer to public, XML now owns 75.62% (2009:76.04%) of the outstanding share capital of the Company. Though the open offer procedures were completed on April 9, 2009, XML obtained the power of operational control of the Company effective January 1, 2009.

(Rs. ’000)

2.1 Contingent Liabilities:

2010 2009

Bank Guarantees [Note (b)] 351,782 369,182

Income tax matters:

Assessment year 2004-05 [Note (c)] 5,820 5,820 Assessment year 2005-06 [Note (d)] 119,316 119,316 Assessment year 2006-07 [Notes (e)] 13,741 124,151 Assessment year 2007-08 [Notes (f)] 7,210 -

Notes:

(a) The above contingent liabilities are possible obligation or present obligation that may (but probably will not) require an outflow of resources.

(b) Bank guarantee facilities are mainly with Yes Bank for the purpose of issuance of standby letter of credit (SBLC) in favour of a correspondent bank in India / outside India for extending bank guarantee facilities to the Company’s subsidiaries in the USA and Australia. In the event of default by the subsidiaries, the Company will have to indemnify Yes Bank.

(c) Relates to transfer pricing adjustment for arms length price by the assessing officer and other adjustments which is disputed by the Company, and the matter is lying under appeal with the Commissioner of Income-tax (Appeals), Bangalore. An amount of Rs.2,802 (2009: Rs.2,802) has been paid under protest against the demand.

(d) Relates to transfer pricing adjustment for arms length price by the assessing officer and other adjustments which is disputed by the Company, and the matter is lying under appeal with the Commissioner of Income-tax (Appeals), Bangalore. An amount of Rs.30,504 (2009: Rs.15,000) has been paid under protest against the demand.

(e) Relates to certain tax adjustments arrived at by the assessing officer, which is disputed by the Company. An amount of Rs. 3,800 (2009: Nil) has been paid under protest against the demand. The Company has filed an appeal to the Income Tax Appellate Tribunal in this regard.

(f) Relates to transfer pricing adjustment for arms length price by the assessing officer which is disputed by the Company, and the matter is to filed with the Income Tax Dispute Resolution Panel, Bangalore.

Contingent Liabilities does not include the following:

(i) The Company has export obligations in India under the Software Technology Parks of India (STPI) scheme. In accordance with such scheme, the Company procures capital goods without payment of duties, for which, agreements and bonds are executed by the Company in favour of the Government. In case the Company does not fulfil the export obligation, it is liable to pay, on demand an amount equal to such duties saved including interest and liquidated damages. As at December 31, 2010, the Company has availed duty benefits amounting to Rs.74,497 (2009: Rs 72,847). The Company expects to meet its commitment to earn requisite revenue in foreign currency as stipulated by the STPI regulations.

(ii) The Company has counter guaranteed the term loan facility of Rs. 3,006,244 (US$ 66 million) (2009: 2,578,950 (US$ 55 million) ) granted by Xchanging UK Limited, a fellow subsidiary of the Company, to Cambridge Integrated Services Group Inc, USA, a wholly owned subsidiary of the Company.

(iii) As at December 31, 2010, Cambridge Integrated Services Group Inc. USA and Scandent Group Inc. USA, both wholly owned subsidiary companies have negative net assets amounting to Rs 3,998,501(2009 Rs. 4,279,019 ) and Rs.1,850,570 (2009: Rs. 1,778,176) respectively. While the respective subsidiaries are confident of generating funds from their operations, the Company intends to support the shortfall, if any.

2.3 Employee benefits

Defined contribution plan:

During the year, the Company has recognised Rs.46,269 (2009 : Rs.35,514) in the Profit and Loss Account relating to defined contribution plans, which are included in the Contribution to Provident and other funds in Schedule 15.

Defined benefit plan:

The Company provides for gratuity, a defined benefit plan (the gratuity plan) to its employees in India. The gratuity plan provides a lump sum payment to vested employees at retirement or termination of employment based on the respective employee’s last drawn salary and years of employment with the Company.

The following tables summarise the components of net benefit expense recognised in the profit and loss account and amounts recognised in the balance sheet for the gratuity plan.

2.4 Segment reporting

The primary segment reporting of the Company is on the basis of business segments. The Company is organised into two business segments, viz., Information Technology and related services (IT) and Business Process Outsourcing (BPO). Segments have been identified and reported considering industry segments of customers, risks and returns, organisation structure and internal financial reporting systems.

Secondary segment reporting is performed on the basis of the geographical location of customers. The management views the USA, Europe (comprising France and UK) and Rest of the World (comprising India, Australia and Singapore) as distinct geographical segments.

Corporate activities such as treasury and taxation, which do not qualify as operating segments under Accounting Standard 17, ‘Segment Reporting’, have been considered as unallocated items.

2.5. Lease disclosures

(A) Operating leases

(i) In case of assets taken on lease:

The Company has operating leases for its office premises, guest houses and certain equipment. The lease arrangements for premises and guest houses have been entered up to a maximum of six years from the respective dates of inception. Some of these lease arrangements have price escalation clauses.

Rent and hire charges for such operating leases recognised in the Profit and Loss Account for the year ended December 31, 2010 amounts to Rs 130,552 (2009: Rs 117,616).

(B) Finance leases

In case of assets taken on lease:

The Company has entered into an arrangement for lease of a vehicle. The lease arrangement is for a period of five years. Under the terms of the lease, the Company is required to pay a monthly instalment over the lease term.

2.6 Taxation

Current tax

Current tax charge reflects provision for income tax based on the taxable income of the Company after considering taxable income as per the local tax laws applicable in the respective countries. While ascertaining the taxable income for the current year, the brought forward losses of the respective entities, if any, have also been considered.

In India, the Company operates out of six facilities (two each in Chennai and Bangalore, one in Mumbai and one in Shimoga). The Bangalore and Shimoga units are registered with the Software Technology Parks of India (STPI) and are eligible to claim tax holiday under Section 10A of the Income-tax Act, 1961, of India. In Chennai, the Company has two units, one step up during 2002 which is not eligible to claim tax holiday benefit and the second facility transferred to the Company as a result of demerger of IT division of SSI Limited is entitled for tax holiday under Section 10(A) of the Income Tax Act 1961.

The current tax charge for the Company includes minimum alternate tax (MAT) determined under Section 115JB of the Income Tax Act, 1961.

MAT Credit Entitlement

Based on assessment of future taxable income and potential sunset of tax holiday period, the management is of the opinion that there is convincing evidence that the Company will pay normal income tax within the specified period during which MAT credit is available for set off. Accordingly, MAT Credit Entitlement asset (disclosed under Loans and Advances) of Rs.82,489 (2009: Rs 52,446) has been recognised during the year by way of a credit to profit and loss account. However, MAT Credit Entitlement asset will be reviewed at each balance sheet date for write-down, if any.

Deferred Tax

In terms of the provisions of the Accounting Standard - 22 "Accounting for Taxes on Income" no deferred tax asset has been recognised considering accumulated business losses and unabsorbed depreciation by virtue of there being no virtual certainty supported by convincing evidence of future taxable income. However, this position will be reassessed at every period end.

Transfer pricing

The Company has significant intra group transactions pertaining to revenue and expenses cross charge. The management is in the process of updating the transfer pricing study for such transactions entered into during the year ended December 31, 2010, and does not anticipate any adjustments with regard to the transactions involved.

2.7 The Company has investments amounting to Rs.676,789 (2009:Rs.676,789) in Scandent Group, Inc., USA ("SG Inc"), its wholly owned subsidiary. Further, the Company has granted loans and advances aggregating to Rs1,732,980 (2009:Rs.1,884,901) and also has receivables ( net of payables) from the subsidiary amounting to Rs.256,870 (2009:Rs.218,669). Based on an evaluation in the earlier years, the Company has made a provision of Rs.766,420 (2009:Rs.766,420) against the loans, advances and receivables. The Company considers SG Inc a strategic long term investment and based on a proposed strategic restructuring plan and future growth projections, in the opinion of the management, the aforesaid investments, loans, advances and receivables are considered good and recoverable.

2.8 Owing to change in strategic priorities, the investment in Cambridge Integrated Services Group, Inc, USA, a wholly owned subsidiary of the Company, which is categorised as a long term investment in accordance with AS 13 "Accounting for Investments" has been fully impaired considering the diminution in value of investment to be "a decline other than temporary". The Company tested the investment for impairment using cash flow forecasts based on approved budgets and using a discounted cash flow method.

2.9 Details of utilisation of proceeds raised through preferential issues

During the financial year ended March 31, 2006, the Company had made preferential allotment of 1,025,227 equity shares of Rs.10 each at a premium of Rs.210 per share and preferential allotment of 5.22% Convertible Bonds amounting to Rs.1,336,500 (2009: Rs.1,336,500) to Indopark Holdings Limited, a wholly owned subsidiary of Merrill Lynch & Co.

2.10 Figures in the accounts and notes are all in rupees thousands except for certain figures in the notes on Schedules 1 and 4 and note 3.7 and 3.14 above.

2.11 Prior year comparatives

Previous years figures have been regrouped/ reclassified wherever necessary to conform to the current years presentation


Dec 31, 2009

1. BACKGROUND

Cambridge Solutions Limited (‘the Company’), incorporated on February 1, 2002, is a business process outsourcing (BPO) and information technology (IT) services provider with operations in India and an international presence established through offices in several countries including the USA and Australia.

Pursuant to agreements, arrangements, amalgamations, etc. (with requisite approvals from various High Courts in India, wherever applicable), the Company has, during earlier years, acquired BPO and IT services businesses (including assets and liabilities) of / from following entities:

- SSI Limited (Information Technology division with operations in India, USA and several other countries).

- Scandent Group Limited, Mauritius (with operations in USA, Singapore, Germany, etc.).

- Cambridge Services Holdings LLC, USA (with operations in USA and Australia).

- Cambridge Integrated Services India Private Limited (with operations in India)

- Matrix One India Limited (with operations in India)

Pursuant to share purchase agreements between Xchanging (Mauritius) Limited (XML), a wholly owned subsidiary of Xchanging Plc, a listed company incorporated in UK, and the erstwhile principal shareholders of the Company, and consequent open offer to public, XML now owns 76.04% of the outstanding share capital of the Company. Though the open offer procedures were completed on April 9, 2009, XML obtained the power of operational control of the Company effective January 1, 2009.

(Rs. ’000)

2.1 Contingent Liabilities:

2009 2008

Bank Guarantees [Note (b)] 369,182 353,175

Income tax matters: Assessment year 2004-05 [Note (c)] 5,820 5,820

Assessment year 2005-06 [Note (d)] 119,316 119,316

Assessment year 2006-07 [Note (e)] 124,151 -

Notes:

(a) The above contingent liabilities are possible obligation or present obligation that may (but probably will not) require an outflow of resources.

(b) Bank guarantee facility with Yes Bank for the purpose of issuance of standby letter of credit (SBLC) in favour of a correspondent bank in India / outside India for extending bank guarantee facilities to the Companys subsidiaries in the USA and Australia. In the event of default by the subsidiaries, the Company will have to indemnify Yes Bank.

(c) Relates to transfer pricing adjustment for arms length price proposed by the assessing officer of Rs.95,280 (2008: Rs.95,280), which is disputed by the Company, and the matter is lying under appeal with the Commissioner of Income- tax (Appeals), Bangalore. An amount of Rs.2,802 (2008: Rs.2,802) has been paid under protest against the demand.

(d) Relates to transfer pricing adjustment for arms length price proposed by the assessing officer of Rs.223,468 (2008: Rs.223,468), which is disputed by the Company, and the matter is lying under appeal with the Commissioner of Income- tax (Appeals), Bangalore. An amount of Rs.15,000 (2008: Rs.15,000) has been paid under protest against the demand.

(e) Relates to transfer pricing adjustment for arms length price proposed by the assessing officer of Rs.228,032 (2008: Nil), which is disputed by the Company, and the matter is lying under appeal with the Income Tax Dispute Resolution Panel, Bangalore.

Contingent Liabilities does not include the following:

(i) The Company has export obligations under the Software Technology Parks of India (STPI) scheme. In accordance with such scheme, the Company procures capital goods without payment of duties, for which, agreements and bonds are executed by the Company in favour of the Government. In case the Company does not fulfil the export obligation, it is liable to pay, on demand an amount equal to such duties saved including interest and liquidated damages. As at December 31, 2009, the Company has availed duty benefits amounting to Rs.72,847 (2008: Rs.61,882). The Company expects to meet its commitment to earn requisite revenue in foreign currency as stipulated by the STPI regulations.

(ii) The Company has counter guaranteed the term loan facility of Rs.2,578,950 (2008: Nil) granted by Xchanging UK Limited, a fellow subsidiary of the Company, to Cambridge Integrated Services Group, Inc USA, a wholly owned subsidiary of the Company.

(iii) As at December 31, 2009, Cambridge Integrated Services Group Inc. USA, Scandent Group Inc. USA and Scandent Group GmbH, Germany, all wholly owned subsidiary companies have negative net assets amounting to Rs 4,279,019 (2008 -- Rs 330,885), Rs 1,778,176 (2008 -- Rs 1,531,967) and Rs 31,177 (2008 -- Rs 31,647), respectively. While the respective subsidiaries are confident of generating funds from their operations, the Company has committed to fund the shortfall, if any.

2.3 Employee benefits

Defined benefit plan:

The Company provides for gratuity, a defined benefit plan (the gratuity plan) to its employees in India. The gratuity plan provides a lump sum payment to vested employees at retirement or termination of employment based on the respective employee’s last drawn salary and years of employment with the Company.

The following tables summarise the components of net benefit expense recognised in the profit and loss account and amounts recognised in the balance sheet for the gratuity plan.

2.4 Segment reporting

The primary segment reporting of the Company is on the basis of business segments. The Company is organised into two business segments, viz., Information Technology and related services (IT) and Business Process Outsourcing (BPO). Segments have been identified and reported considering industry segments of customers, risks and returns, organisation structure and internal financial reporting systems.

Secondary segment reporting is performed on the basis of the geographical location of customers. The management views the USA, Europe (comprising France and UK), Australia and Rest of the World as distinct geographical segments.

Corporate activities such as treasury and taxation, which do not qualify as operating segments under Accounting Standard 17, ‘Segment Reporting’, have been considered as unallocated items.

2.5 Related party disclosures

A. Names of related parties and description of relationship

Ref. Description of relationship Names of related parties

(a) Parties where control exists: Holding companies:

Ultimate holding company Xchanging Plc, UK

Intermediate holding companies Xchanging Holdings Limited, UK

Xchanging BV, The Netherlands Immediate holding company Xchanging (Mauritius) Limited, Mauritius

Subsidiary companies Cambridge Solutions Europe Limited, UK

Cambridge Solutions Pte Limited, Singapore

Scandent Group Sdn Bhd, Malaysia

Scandent Group GmbH, Germany

Scandent Group Inc., USA

Indigo Markets Limited, Bermuda

Cambridge Integrated Services Group Inc., USA

Cambridge Galaher Settlements & Insurance Services, USA

Cambridge Integrated Services Victoria Pty Limited, Australia

Cambridge Integrated Services Australia Pty Limited, Australia

Cambridge Solutions Pty Limited, Australia

Cambridge Solutions France SARL, France

ProcessMind Holding Mauritius Limited, Mauritius

Nexplicit India Infotech Private Limited, India

(b) Parties under common control with whom transactions have taken place during the year:

Fellow subsidiaries Xchanging Systems and Service Inc., USA.

Xchanging Broking Services Limited, UK. Xchanging Claim Services Limited, UK. Xchanging Global Insurance Systems Ltd., UK. Xchanging Technology Services India Private Limited, India Xchanging UK Limited, UK.

(c) Key management personnel:

Executive Chairman and CEO David Andrews (*) (appointed on January 12, 2009)

Executive Vice Chairman Richard Houghton (*)(appointed on January 12, 2009)

Executive Director and Chief Financial Officer Darren Fisher (appointed on July 31, 2009)

Executive Director and Chief Production Officer Thomas Runge (*)(appointed on October 22, 2009)

(*) No transactions during the year.

Notes:

(i) The above information and those in “B. Summary of transactions with related parties” have been determined to the extent such parties have been identified on the basis of information provided by the Company, which has been relied upon by the auditors.

2.6. Lease disclosures

i. Operating leases

In case of assets taken on lease:

The Company has operating leases for its office premises, guest houses and certain equipment. The lease arrangements for premises and guest houses have been entered up to a maximum of six years from the respective dates of inception. Some of these lease arrangements have price escalation clauses.

Rent and hire charges for such operating leases recognised in the Profit and Loss Account for the year ended December 31, 2009 amounts to Rs 109,613 (2008 -- Rs 98,772).

ii. Finance leases

In case of assets taken on lease:

The Company has entered into an arrangement for lease of a vehicle. The lease arrangement is for a period of five years. Under the terms of the lease, the Company is required to pay a monthly installment over the lease term.

2.7 Taxation

Current tax

Current tax charge reflects provision for income tax based on the taxable income of the Company after considering taxable income as per the local tax laws applicable in the respective countries. While ascertaining the taxable income for the current year, the brought forward losses of the respective entities, if any, have also been considered.

In India, the Company operates out of six facilities (two each in Chennai and Bangalore, one in Mumbai and one in Shimoga). The Bangalore and Shimoga units are registered with the Software Technology Parks of India (STPI) and are eligible to claim tax holiday under Section 10A of the Income-tax Act, 1961, of India. In Chennai, the Company has two units, one step up during 2002 which is not eligible to claim tax holiday benefit and the second facility transferred to the Company as a result of demerger of IT division of SSI Limited.

The current tax charge for the Company includes minimum alternate tax (MAT) determined under Section 115JB of the Income Tax Act, 1961.

MAT Credit Entitlement

Based on assessment of future taxable income and potential sunset of tax holiday period, the management is of the opinion that there is convincing evidence that the Company will pay normal income tax within the specified period during which MAT credit is available for set off. Accordingly, MAT Credit Entitlement asset (disclosed under Loans and Advances) of Rs.52,446 (2008: Nil) has been recognised during the year by way of a credit to profit and loss account. However, MAT Credit Entitlement asset will be reviewed at each balance sheet date for write-down, if any.

Transfer pricing

The Company has significant intra group transactions pertaining to revenue and expenses cross charge. The management is in the process of updating the transfer pricing study for such transactions entered into during the year ended December 31, 2009, and does not anticipate any adjustments with regard to the transactions involved.

2.8 Loan processing fees and deferred costs

Based on a review during the year of the upfront loan processing fees and deferred costs stated under Miscellaneous Expenditure, the Company has charged off the unamortised balances, under both the categories, to the Profit and Loss Account thereby reducing net profit for the year by Rs.23,180.

2.9 Scandent Inc USA receivable

As at December 31, 2009, the Company has net receivables (after eliminating payables) from Scandent Group Inc, USA, a wholly owned subsidiary of the Company, of Rs.1,945,437 (2008: Rs.972,449) [net of payables: Rs.218,669 (2008: Rs.392,035)]. Based on an evaluation, the Company has made a provision of Rs.766,420 (2008: Rs.766,420) against the net receivables in an earlier year. The Company, based on strategic funding plans, believes that the remaining dues are good and will be recovered in the foreseeable future.

2.10 Details of utilisation of proceeds raised through preferential issues

During the financial year ended March 31, 2006, the Company had made preferential allotment of 1,025,227 equity shares of Rs.10 each at a premium of Rs.210 per share and preferential allotment of 5.22% Convertible Bonds amounting to Rs.1,336,500 (2008: Rs.1,336,500) to Indopark Holdings Limited, a wholly owned subsidiary of Merrill Lynch & Co.

2.11 Prior year comparatives

The profit and loss account for the current year is for twelve months period whereas the profit and loss for the prior period was for nine months, and accordingly, the figures between the two periods are not strictly comparable. Previous periods figures have been regrouped/ reclassified wherever necessary to conform to the current years presentation. Figures in the accounts and notes are all in rupees thousands except for certain figures in the notes on Schedules 1 and 4 and note 3.7 and 3.14 above.