financial statements prepared in accordance with us gaap ......see accompanying notes to...

Financial Statements Prepared in Accordance with US GAAP – Fiscal 2006

REPORT FOR THE YEAR ENDED MARCH 31, 2006

CONTENTS PAGE NO.

Board of Directors .................................................................................................................................................................... 1

Management Team .................................................................................................................................................................. 2

Report of Independent Auditors .......................................................................................................................................... 4

Consolidated Balance Sheets As of March 31, 2005 and March 31, 2006 ..................................................................... 5

Consolidated Statements of Income for the three years ended March 31, 2004, 2005 and 2006 ........................... 6

Consolidated Statements of Changes in Shareholders’ Equity for the three years

ended March 31, 2004, 2005 and 2006 ................................................................................................................................ 7

Consolidated Statements of Cash Flows for the three years ended March 31, 2004, 2005 and 2006 .................... 8

Notes to the Consolidated Financial Statements ............................................................................................................... 10

Management Discussion and Analysis .................................................................................................................................. 44

1

Board of Directors

R N Tata (Chairman)

S Ramadorai (CEO and Managing Director)

Aman Mehta

Naresh Chandra

V Thyagarajan

Clayton M Christensen

Company Secretary

S H Rajadhyaksha

Statutory Auditors

S B Billimoria & Co.

US GAAP Auditors

Deloitte Haskins & Sells

Registered Office

Bombay House,

24, Homi Mody Street, Fort,

Mumbai 400 001.

Tel : 022 6665 8282

Fax : 022 6665 8080

Website : www.tcs.com

Corporate Office

11th Floor, Air India Building,

Nariman Point,

Mumbai 400 021.

Tel : 022 6750 9999

Fax : 022 6750 9344

Email: [email protected]

Registrars & Transfer Agents

TSR Darashaw Limited

(formerly Tata Share Registry Limited)

Army & Navy Building,

148, M. G. Road, Fort, Mumbai 400 001.

Tel : 022 6656 8484

Fax : 022 6656 8494

E-mail: [email protected]

Website: www.tsrdarashaw.com

2

Management Team

Function Name

Corporate

CEO & MD S RamadoraiCFO S MahalingamCorporate Affairs Phiroz VandrevalaGlobal Sales & Operations N ChandrasekaranGlobal Human Resources S Padmanabhan

Geography Head

North America Surya KantUnited Kingdom A S LakshminarayananEurope Girish RamachandranAsia Pacific Girija Pande

V RajannaJohnson LamMasahiko KajiRick Marmur

Iberoamerica Gabriel RozmanMEA Manoj SahaiIndia K Jayaramakrishnan

S Venkatramani

Governance Functions

Marketing J V PendharkarKeith SharpJohn LenzenJim Thomas

R & D Mathai JosephK V NoriM VidyasagarGautam ShroffSunil Sherlekar

Technology K AnanthakrishnanHuman Resources Ritu Anand

K GanesanDilip MohapatraThomas SimonLarry ChenGloria FogelJyoti Srivastava

Information Systems Alok KumarBandana Sinha

Legal Satya HegdeAdministration G GeorgeFinance B Sanyal

V RamakrishnanPauroos Karkaria

Company Secretary S H Rajadhyaksha

3

Industry Practices

Banking & Financial Services N G SubramaniamJ R BhandariRavi Shah

Insurance K PadmanabhanUsha Lakshmanan

Telecom N SivasambanGovernment Tanmoy ChakrabartyHealthcare & Life Sciences J RajagopalEnergy & Utilities Ajoyendra MukherjeeRetail Pratik PalMedia Entertainment Edward AltmanTravel & Hospitality G Srinivasa Raghavan

Service Practices

Engineering and Industrial Services Ravi GopinathRegu Ayyaswamy

Business Process Outsourcing Milind KamatEnterprise Solutions Hasit Kaji

Abhijit MajumdarRaj Agarwal

Technology Solutions Anita NanadikarInfrastructure Services P R KrishnanBusiness Intelligence Santosh MohantyConsulting Per Bragee

Arun AgarwalV Ramaswamy

Migration / Re-engineering Solutions Sudheer WarrierSecurity R K RaghavanSystem Integration / Outsourcing B GopalAssurance Service G R K Mohan

Products

Banking N G Subramaniam

John WesteInsurance Pradipta PanditClearing & Settlement R VivekanandSecurity Sanjay BhanotNCS Manoj Govel

Global Delivery

Ravi ViswanathanG RamanathanNagraj IjariAbid AliDebashis GhoshAjoyendra MukherjeeVijay Srirangan

Function Name

4

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

Tata Consultancy Services Limited:

We have audited the accompanying consolidated balance sheets of Tata Consultancy Services Limited and

subsidiaries (collectively referred to as “TCS Limited” or the “Company”) as of March 31, 2005 and 2006 and

the related consolidated statements of income, shareholders’ equity, and cash flows for three-year ended

March 31, 2006, all expressed in Indian rupees. These financial statements are the responsibility of the

Company’s management. Our responsibility is to express an opinion on these financial statements based on our

audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of

America. Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement. An audit includes consideration of

internal control over financial reporting as a basis for designing audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal

control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a

test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the

accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated

financial position of TCS Limited as of March 31, 2005 and 2006, and the consolidated results of its operations

and its cash flows for each of the years in the three-year period ended March 31, 2006, in conformity with

accounting principles generally accepted in the United States of America.

/s/ Deloitte Haskins & Sells

CHARTERED ACCOUNTANTSMumbai, India

May 12, 2006

5

Consolidated Balance SheetsAs of March 31, 2005 and March 31, 2006

As of March 31, As of March 31,2005 2006

(In millions, except number of shares)ASSETS:Current assets:

Cash and cash equivalents Rs.2,777.9 Rs.3,965.0Accounts receivable (net of allowances of Rs.962.9 million

and Rs.1,108.5 million, respectively) 22,136.1 32,789.8Unbilled revenues 2,371.8 4,712.3Inventories 705.4 806.3Prepaid expenses and other current assets (net of

allowances of Rs. 98.6 million and Rs.113.3 million,respectively) 5,659.4 7,326.8

Total current assets 33,650.6 49,600.2

Investments 4,760.4 7,086.1Equity in affiliates 167.6 188.0Property and equipment, net 11,380.8 15,071.5Intangible assets, net 101.8 4,062.6Goodwill 446.5 4,629.5Other non-current assets 3,334.7 4,988.1

Total assets Rs.53,842.4 Rs.85,626.0

LIABILITIES AND SHAREHOLDERS’ EQUITY:Liabilities:Current liabilities:

Accrued expenses and other current liabilities Rs.12,628.2 Rs.17,409.0Unearned and deferred revenues 1,985.7 5,317.3Short-term borrowings 2,138.2 979.4

Total current liabilities 16,752.1 23,705.7

Other non-current liabilities 497.6 1,948.8

Total liabilities 17,249.7 25,654.5

Minority interests 1,322.9 1,563.7

Commitments and contingencies (see note 27) – –

Shareholders’ equity:Equity shares; Par values Re.1 per share and Re.1 per share;authorized 600,000,000 and 600,000,000 equity shares,respectively; issued and fully paid-up 480,114,809 and489,305,249 equity shares, respectively 480.1 489.3Additional paid-in-capital 21,583.9 24,861.6Accumulated other comprehensive loss (182.9) (144.2)Retained earnings 10,096.2 33,201.1TIL Shareholders’ equity (see note 17) 3,292.5 –

Total shareholders’ equity 35,269.8 58,407.8

Total liabilities and shareholders’ equity Rs.53,842.4 Rs.85,626.0

See accompanying notes to consolidated financial statements

6

Consolidated Statements of IncomeFor the three years ended March 31, 2004, 2005 and 2006

Year ended Year ended Year endedMarch 31, 2004 March 31, 2005 March 31, 2006

(In millions, except earnings per share data)Revenues:

Consultancy services Rs.69,269.0 Rs.94,855.6 Rs.120,952.7Sale of equipment and software licenses 6,868.2 10,380.9 8,468.2Other revenues 895.7 1,157.7 3,033.6

Total revenues 77,032.9 106,394.2 132,454.5

Cost of Revenues:Cost of services 36,786.2 50,327.7 64,330.7Cost of equipment and software licenses 5,874.2 9,372.5 7,389.2

Total cost of revenues 42,660.4 59,700.2 71,719.9

Gross profit 34,372.5 46,694.0 60,734.6Operating Expenses:

Selling, general and administrative expenses 15,127.4 22,302.2 26,422.2Research and development 399.0 403.4 418.8

Total operating expenses 15,526.4 22,705.6 26,841.0

Operating income 18,846.1 23,988.4 33,893.6Other income (expense):

Interest income 335.1 142.1 257.6Interest expense (142.6) (157.3) (89.2)Other non-operating income, net 817.3 2,128.4 21.8

Other income, net 1,009.8 2,113.2 190.2

Income before income taxes and minority interests 19,855.9 26,101.6 34,083.8Income tax expense 2,914.7 4,798.8 4,989.1

Income before minority interests 16,941.2 21,302.8 29,094.7Minority interests (125.4) (79.0) (279.4)Equity in net earnings of affiliates 159.3 3.1 15.7

Income from continuing operations beforeextraordinary gain 16,975.1 21,226.9 28,831.0

Extraordinary gain – 48.9 –

Net income Rs.16,975.1 Rs.21,275.8 Rs.28,831.0

Weighted average number of shares used incomputing basic earnings per share: 464,543,440 479,512,361 489,162,044

Basic earnings per share:Income from continuing operations beforeextraordinary gain Rs.36.54 Rs.44.27 Rs.58.94Extraordinary gain Rs. – Rs. 0.10 Rs. –Net Income Rs.36.54 Rs.44.37 Rs.58.94

Weighted average number of shares used incomputing diluted earnings per share: 464,551,140 479,527,120 489,162,044

Diluted earnings per share:Income from continuing operations beforeextraordinary gain Rs.36.54 Rs.44.27 Rs.58.94Extraordinary gain Rs. – Rs. 0.10 Rs. –Net Income Rs.36.54 Rs.44.37 Rs.58.94


7

Consolidated Statements of Changes in Shareholders’ EquityFor the three years ended March 31, 2004, 2005 and 2006

Share Capital

Number of Equity Additional Comprehensive Accumulated Retained TIL Totalshares share paid- in- income other earnings Share- Share-

capital capital comprehensive holders’ holders’income (loss) equity equity

(In millions, except number of shares)Balance at March 31, 2003 36,440,002 Rs.364.4 Rs.– Rs.8.8 Rs.13,149.6 Rs.2,397.6 Rs.15,920.4

Net income 16,975.1 16,369.2 605.9 16,975.1

Unrealized (loss) / gain on available-for-salesecurities, net of realized earnings and taxes 23.8 19.9 3.9 23.8

Foreign currency translation adjustment (156.2) (158.4) 2.2 (156.2)

Comprehensive income Rs.16,842.7

Excess of fair value over exercise priceof options 3.9 3.9

Proceeds from sale of shares under ESOP 4.0 4.0

Dividend paid including tax on dividend (152.5) (152.5)

Distributions to Tata Sons (13,274.9) (13,274.9)

Balance at March 31, 2004 36,440,002 Rs.364.4 Rs.– Rs.(129.7) Rs.16,243.9 Rs.2,865.0 Rs.19,343.6

Net income 21,275.8 20,521.3 754.5 21,275.8

Unrealized (loss) / gain on available-for-salesecurities,net of realized earnings and taxes (23.7) (26.5) 2.8 (23.7)

Foreign currency translation adjustment (25.7) (26.7) 1.0 (25.7)


Distributions to Tata Sons Limited(see note 2) (23,000.0) (23,000.0)

Stock split (see note 17) 419,060,027 91.1 (91.1) –

Issue of equity shares (see note 17) 22,775,000 22.8 19,336.0 19,358.8

Share offering costs (461.6) (461.6)

Issue of shares under ESPS (see note 18) 1,839,780 1.8 1,864.4 1,866.2

Cash grant to employees by Tata Sons(see note 19) 845.1 845.1



Dividends paid including tax on dividend (3,577.9) (347.1) (3,925.0)

Balance at March 31, 2005 480,114,809 Rs.480.1 Rs.21,583.9 Rs.(182.9) Rs.10,096.2 Rs.3,292.5 Rs.35,269.8Net income 28,831.0 28,190.5 640.5 28,831.0

Unrealized (loss) / gain on available-for-salesecurities, net of realized earnings and taxes 51.5 55.7 (4.2) 51.5

Foreign currency translation adjustment 21.6 19.9 1.7 21.6

Effective portion of loss on derivativeinstruments (44.2) (44.2) (44.2)


Issue of equity shares to Tata Sons Limitedand its controlled entities (see note 4) 6,880,421 6.9 315.1 7.3 2,578.7 (2,908.0) –

Issue of shares to minorities of TIL(see note 4) 2,310,019 2.3 2,962.6 (976.6) 1,988.3

Dividends paid including tax on dividend (7,664.3) (258.0) (7,922.3)



Balance at March 31, 2006 489,305,249 Rs.489.3 Rs.24,861.6 Rs.(144.2) Rs.33,201.1 Rs.– Rs.58,407.8


8


(In millions)

Cash flows from operating activities:Net income Rs.16,975.1 Rs.21,275.8 Rs.28,831.0Adjustments to reconcile net income to netcash provided by operating activities:

Depreciation and amortization 1,317.4 1,723.6 2,854.6Gain on sale of property and equipment (8.1) (2.9) (261.9)Deferred income taxes 191.8 365.1 165.0Equity in net earnings of affiliates (159.3) (3.1) (15.7)Dividend from affiliate 59.0 65.1 –Minority interests 125.4 79.0 279.4Gain on sale of available-for-sale investments (3.7) (20.2) (30.5)Gain on sale of equity accounted affiliates (167.0) (1,322.4) –Impairment of securities at cost investments 186.6 63.0 –Impairment of intangible asset 115.0 – –Compensation expense on account of cash grantto employees by Tata Sons (see note 19) – 845.1 –Impairment loss on Goodwill 13.4 – –Stock compensation expense 3.9 1,872.6 141.3Extraordinary gain on acquisition of a subsidiary – (48.9) –

Net change in:Accounts receivable 4.3 (7,159.0) (10,038.6)Unbilled revenues (465.1) 1,068.6 (2,339.4)Inventories 67.7 (242.3) (37.6)Prepaid expenses and other current assets (178.8) (1,421.6) (1,468.1)Other non-current assets (688.7) (641.4) (509.1)Accrued expenses and other current liabilities (421.0) 3,306.2 3,912.6Unearned and deferred revenues 141.3 491.3 3,330.6Other non-current liabilities (46.9) 92.9 51.4

Net cash provided by operating activities 17,062.3 20,386.5 24,865.0

Cash flows from investing activities:Purchase of available-for-sale investments (1,688.7) (5,356.8) (86,982.4)Purchase of other investments (85.8) (110.1) –Purchase of property and equipment (2,878.4) (3,614.8) (6,289.0)Purchase of subsidiaries and business, net ofcash acquired (293.4) (454.6) (6,600.0)Purchase of investment in affiliate (210.5) (2.8) (2.6)Proceeds from sale of available-for-saleinvestments 985.2 1,856.2 84,898.8Proceeds from sale of other investments 8.6 1.1 11.9Proceeds from sale of investments in affiliates 495.7 1,610.0 –Proceeds from sale of property and equipment 89.1 55.0 378.3Acquisition of Intangible assets – (19.7) –Net change in short-term deposits 92.2 – –

Net cash used in investing activities (3,486.0) (6,036.5) (14,585.0)

Consolidated Statements of Cash FlowsFor the three years ended March 31, 2004, 2005 and 2006

9


(In millions)Cash flows from financing activities:

Net change in short-term borrowings 201.2 (5,353.3) (1,193.3)

Distributions to Tata Sons (see note 2) (13,274.9) (23,000.0) –

Dividends paid to minority shareholders of a

subsidiary (33.4) (45.9) (38.0)

Dividends paid (152.5) (3,925.0) (7,922.3)

Proceeds from issue of shares under ESOP 4.0 8.1 70.8

Proceeds from issue of shares (net of offering costs) – 18,899.0 –

Proceeds from issue of shares by a subsidiary 54.5 22.3 –

Net cash used in financing activities (13,201.1) (13,394.8) (9,082.8)

Net change in cash 375.2 955.2 1,197.2

Effect of foreign exchange on cash flows (37.9) 4.6 (10.1)

Cash and cash equivalents, beginning of the year 1,480.8 1,818.1 2,777.9

Cash and cash equivalents, end of the year Rs.1,818.1 Rs.2,777.9 Rs.3,965.0

Supplementary cash flow information:

Interest paid Rs.136.7 Rs.185.7 Rs.91.3

Income taxes paid Rs.2,278.7 Rs.4,316.6 Rs.5,965.9

In respect of non-cash transactions pertaining to TIL, refer Note 4


Consolidated Statements of Cash Flows (contd.)For the three years ended March 31, 2004, 2005 and 2006

10

Notes to Consolidated Financial Statements

1. Background and Operations

Tata Consultancy Services Limited and its subsidiaries (collectively TCS Limited) provide a wide range of

information technology and consultancy services including systems hardware and software, communications

and networking, hardware sizing and capacity planning, software project management solutions,

technology education services and business process outsourcing.

Tata Sons Limited owns 79.55% of Tata Consultancy Services Limiteds’ equity share capital and controls

its operations.

2. Reorganization

Transfer of TCS Division to Tata Consultancy Services Limited

The TCS Division of Tata Sons Limited (Tata Sons) was transferred (the Transfer) to Tata Consultancy

Services Limited with effect from April 1, 2004. On August 19, 2004, Tata Consultancy Services Limited

offered 22,775,000 equity shares under the initial public offering which are listed on The Stock Exchange,

Mumbai (BSE) and the National Stock Exchange of India (NSE). In connection with the Transfer, TCS Limited

paid Rs.23,000 million to Tata Sons.

The transfer of the TCS Division into Tata Consultancy Services Limited has been accounted for on a

historical cost basis, as the transfer is a transaction between entities under common control of Tata Sons

Limited. Accordingly, the results of the TCS Division have been consolidated with the results of TCS Limited

for all periods presented, in a manner similar to pooling of interests. Inter-company transactions have been

eliminated.

The financial statements of TCS Limited and the TCS Division for the year ended and as of March 31,

2004 have been combined as though Transfer was effective in that period. Tata Sons’ Net Investment in

the TCS Division which represented the consolidated net income of the TCS Division as adjusted for cash

withdrawals has been combined with the retained earnings of TCS Limited. Inter-company transaction and

balances have been eliminated on combination.

Merger of Tata Infotech Limited and Tata Consultancy Services Limited

In accordance with the Scheme of Amalgamation (“Scheme”) of the Tata Infotech Limited (TIL) with

the Company all of TIL’s assets and liabilities, have been transferred to and vested in Tata Consultancy

Services Limited retrospectively with effect from April 1, 2005 (the appointed date). The Scheme came in to

effect on February 1, 2006.

In connection with the TIL Scheme, every shareholder of TIL holding fully paid-up equity shares was

allotted one equity share of Re. 1 each in Tata Consultancy Services Limited, credited as fully paid-up with

rights attached for every two equity shares of Rs. 10 each fully paid-up held in the capital of TIL.

11

The merger of TIL into Tata Consultancy Services Limited has been accounted for on a historical cost

basis, to the extent of Tata Sons Limited’s ownership interests in TIL, as the transfer is a transaction

between entities under common control of Tata Sons Limited. Accordingly, the results of the TIL have been

combined with the results of TCS Limited from April 1, 2005, in a manner similar to pooling of interests.

Acquisition of the non-controlling minority interests of 25.1% in TIL on February 1, 2006 has been

accounted for under the purchase method of accounting.

The financial statements of TCS Limited and TIL as of and for the year ended March 31, 2004 and

March 31, 2005 have been combined as though the TIL Scheme was effective in those periods using the

historical basis in the assets and liabilities and the historical results of operations relating to TIL, based on

the separate records maintained for the business. Inter-company transactions and balances have been

eliminated on combination.

3. Summary of Significant Accounting Policies

a. Basis of presentation

These financial statements have been prepared in accordance with accounting principles generally

accepted in the United States of America (“US GAAP”).

US GAAP differs in certain material respects from accounting principles generally accepted in India

and the requirements of the Indian Companies Act, 1956 (collectively Indian GAAP), which forms the

basis of the general purpose financial statements of TCS Limited. Principal differences in so far as they

relate to TCS Limited include: the preparation of combined financial statements for companies under

common control; continuation of historical cost accounting for reorganization of businesses under

common control; differences in the measurement basis for acquisitions accounted for using the

purchase method; revenue and cost recognition; valuation of investments; accounting for retirement

benefits; compensated absences; stock-based compensation; accounting for deferred income taxes, the

presentation and format of financial statements and related notes.

Certain prior-year amounts have been reclassified to conform to current year presentation.

b. Basis of consolidation

TCS Limited consolidates all entities in which it has a majority financial interest.

Inter-company transactions, balances and unrealized profits and losses are eliminated on

consolidation.

The results of subsidiaries acquired have been consolidated from the date of acquisition, except as

discussed in Note 2 for those entities that have been accounted for as business combinations under

common control. Purchase consideration paid in excess of the fair value of net assets acquired has been

recognized as goodwill. The excess of fair value over purchase consideration has been first allocated to

reduce the amounts otherwise assigned to the eligible acquired long-term assets and any excess

remaining has been recognized as an extraordinary gain in the income statement in the period in

which the business combination was consummated.

12

c. Equity in affiliates

Entities where TCS Limited exerts significant influence, generally where TCS Limited owns between

20% and 50% of the voting stock of the investee company, are accounted for using the equity method.

Inter-company unrealized profits and losses on transactions with these entities are eliminated.

d. Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to

make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures

of contingent assets and liabilities at the date of these financial statements and the reported amounts

of revenues and expenses for the years presented. Actual results could differ from these estimates.

Material estimates in these financial statements that are susceptible to change as more information

becomes available include costs to complete for fixed price contracts, allowances for uncollectible

accounts receivable, useful lives of intangible and tangible assets, impairment assessments of goodwill

and long-lived assets, purchase price allocations on acquisition of business, retirement benefits and

deferred taxes.

e. Revenue recognition

TCS Limited earns revenues primarily from providing consultancy services, including services under

contracts for software development, implementation and other related services, re-licensing of third

party software products and sales, and maintenance of equipment.

TCS Limited recognizes revenue as follows:

Revenues from contracts priced on a time and materials basis are recognized as services are

rendered and as related costs are incurred.

Revenues from turnkey contracts, which are generally time bound fixed price contracts, are

recognized over the life of the contract using the percentage-of-completion method, with contract

costs determining the degree of completion. Revenue recognition using the percentage of completion

method in conformity with SOP 81-1, is based on the guidance in Statement of Position 97-2, Software

Revenue Recognition, to account for revenues under fixed price arrangements for software

development and related services. Losses on such contracts are recognized when probable. Revenues in

excess of billings are recognized as unbilled revenues; to the extent billings are in excess of revenues

recognized, the excess is reported as unearned and deferred revenue in the balance sheet.

Revenues from the sale of computer equipment are recognized upon delivery, which is when title

passes to the customer. TCS Limited acts as a reseller of third party computer equipment products; such

revenues are reported gross as TCS Limited acts as a principal, as it has pricing authority and bears

inventory and credit risk.

Revenues from the sale of internally developed and manufactured systems and third party

software products are recognized upon delivery of a license, which is when the absolute right to use

passes to the customer and TCS Limited does not have any material remaining service obligations.

13

TCS Limited acts as a relicenser of third party software licenses. Revenues from such products are

reported gross as TCS Limited acts as a principal, as it has pricing authority and bears inventory and

credit risk.

Revenues from bundled contracts that involve supplying computer equipment, licensing software

and providing services are recognized separately for each of the elements based on the nature of each

element and their proportional fair values. The fair value of each element is determined by reference

to other unbundled contracts.

TCS Limited reports billed out-of-pocket expenses as revenue.

Revenues from maintenance contracts and from finite period software licenses granted are

recognized on a pro-rata basis over the period of the contract.

All revenues are recognized only when collectibility of the resulting receivable is reasonably

assured, and are reported net of discounts and indirect and service taxes.

f. Cost recognition

Costs and expenses are recognized when incurred and have been classified according to their

primary functions in the following categories:

Cost of services

These costs primarily include employee compensation of personnel when engaged in providing

consultancy services, travel expenses, employee allowances, employee taxes where borne by the

employer, client specific training expenses, depreciation and amortization of production related

equipment and software, losses incurred on fixed price contracts and communication expenses.

Cost of equipment and software licenses

These costs consist of the cost of resold computer equipment and re-licensed software, and include

inward shipping and insurance costs.

Selling, general and administrative expenses

Selling costs primarily include employee compensation for sales and marketing personnel, travel

costs, advertising, business promotion expenses, allowances for delinquent receivables, outward

shipping expenses and market research costs.

General and administrative costs primarily include employee compensation for administrative,

supervisory, managerial and practice management personnel, depreciation and amortization of non-

production equipment and software, rent, insurance, electricity, telecommunication costs, legal and

professional fees, impairment of goodwill and intangibles, valuation allowances and other general

expenses.

14

Research and development expenses

Research and development (R&D) expenses include all costs relating to TCS Limited’s research and

development center and costs incurred for the development of software to be sold.

The R&D center’s expenses primarily consist of employee compensation for research personnel,

facilities expenses for the R&D center and the cost of software and equipment for which there is no

future use within the enterprise. Property and equipment that have a future use within the enterprise

are capitalized and depreciated in the same manner as similar production assets.

Development costs incurred for software to be sold are expensed as incurred as research and

development costs until technological feasibility has been established for the product. Technological

feasibility is established upon completion of a detailed program design or, in its absence, completion of

a working model. Thereafter, all software production costs are deferred and amortized over their

useful lives and reported at the lower of unamortized cost and net realizable value.

g. Foreign currency

The functional currency of Tata Consultancy Services Limited, and its Indian subsidiaries is the Indian

rupee, whereas the functional currencies of TCS America, TCS Asia-Pacific and TCS Iberoamerica is the

US dollar and of other subsidiaries, the currency in their countries of incorporation.

Foreign currency transactions are translated into the functional currency at exchange rates

prevailing on the date of the transaction. Foreign currency denominated monetary assets and liabilities

are translated into the functional currency using exchange rates prevailing on the balance sheet dates.

Gains and losses arising on conversion of foreign currency denominated monetary assets and liabilities

and on foreign currency transactions are included in net income.

The financial statements of foreign subsidiaries have been translated into rupees for the purposes

of consolidation as follows: income statement items have been converted using the average exchange

rates prevailing during the period; assets and liabilities have been translated at the exchange rates

prevailing on the balance sheet date. Any unrealized gains or losses arising on the translation of the

financial statements of the subsidiaries have been reported in other comprehensive income, a separate

component of shareholders’ equity.

h. Stock Based Compensation

Stock based compensation cost is determined based on the fair value of the equity instrument

issued at the grant date. Fair value is measured at the market price at the grant date.

i. Income taxes

Income tax expense comprises of current tax expense and the net change in the deferred tax asset

or liability during the year.

15

Current income taxes:

The current income tax expense includes Indian income taxes payable for TCS Limited’s worldwide

operations after taking credit for benefits available for operations in Software Technology Parks (or

STPs) and export promotion zones (or EPZs) and export earnings, and after offsetting benefits under

tax avoidance treaties for foreign taxes payable in overseas jurisdictions.

The domestic operations are carried out through 35 “undertakings” established in STPs and EPZs,

which are separate taxable entities entitled to tax holidays, and other operations.

Current income tax is payable in each of TCS Limited’s overseas branches are computed in

accordance with the tax laws applicable in the jurisdiction in which the branch operates. The amounts

paid are generally available for offset as tax credits in India against the income tax liability computed

on TCS Limited’s worldwide income.

Until March 31, 2004, the TCS Division’s income was included in the tax returns of Tata Sons. In

these financial statements the current income tax expense of the TCS Division has been computed as

though it was a standalone taxable entity, without taking into account tax liabilities or taxable benefits

generated by other divisions of Tata Sons. The income tax expense for the TCS Division has been

computed using the historical income and expenses and historical tax and book bases for assets and

liabilities in the books of Tata Sons.

In accordance with the Transfer, any future adjustments to Tata Sons’ tax returns for tax years

prior to the date of the Transfer, whether or not related to the TCS Division’s operations will be to the

account of Tata Sons.

The TIL Scheme provides that all income taxes, including tax related assets and liabilities have been

conveyed to Tata Consultancy Services Limited. TIL had net tax operating losses in certain jurisdictions

outside of India in the amount of Rs.920.7 million. Management expects that the tax benefit of TIL’s

tax losses in India and Overseas will become available to Tata Consultancy Services Limited and the

benefit of such tax losses have been recognized in these financial statements in connection with the

combining of TIL with TCS Limited.

The current income tax expense for overseas subsidiaries has been computed based on the laws

applicable to each entity in the jurisdiction in which that entity operates.

Payments of advance taxes and income taxes payable in the same tax jurisdictions are offset.

Deferred income taxes:

Deferred tax assets and liabilities are recognized for the future tax consequences of temporary

differences between the carrying values of assets and liabilities and their respective tax bases, and

unutilized business loss carry forwards. Deferred tax assets and liabilities are computed separately for

each taxable entity in the consolidated enterprise and for each taxable jurisdiction. Valuation

allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax

benefit will not be realized and are separately estimated at each such entity without offsetting.

16

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to

taxable income in the years in which the temporary differences are expected to be received or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income

statement in the period of enactment of the change.

For domestic operations carried out in STPs and EPZs, deferred tax liabilities, if any, have been

established for the tax consequences of those temporary differences between the carrying values of

assets and liabilities and their respective tax bases that reverse after the tax holiday ends. Deferred

tax asset has not been recognized for the reduction in taxes attributable to such tax holidays.

For taxable entities and undertakings that are not entitled to tax holidays, deferred tax assets and

liabilities are recognized for the future tax consequences of temporary differences between the

carrying values of assets and liabilities and their respective tax bases, and operating loss carry

forwards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than

not that a tax benefit will not be realized.

As of March 31, 2004, the deferred tax asset or liability of the TCS Division was computed using

the historical book and tax bases for assets and liabilities in the accounts of Tata Sons. Under Indian tax

laws, the Transfer constitutes a taxable event where the assets and liabilities of the TCS Division have

been revalued at fair values on transfer to Tata Consultancy Services. As a consequence, on the

Transfer date, the deferred tax liability relating to Indian taxes in the TCS Limited’s books has ceased

to exist and became taxable as a capital gain or loss for Tata Sons.

j. Cash and cash equivalents

TCS Limited considers all highly liquid financial instruments, which are readily convertible into cash

and have original maturities of three months or less on the date of purchase, to be cash equivalents.

k. Concentrations of credit risk

Financial instruments that potentially subject TCS Limited to concentrations of credit risk principally

consist of cash and cash equivalents, accounts receivable and unbilled revenues. Information on TCS

Limited’s credit exposures for accounts receivable and unbilled revenues has been reported in Note 5.

l. Inventories

Stores and spares are stated at cost, less provision for obsolescence. Cost is determined on weighted

average basis. Raw materials, sub-assemblies and components are valued at lower of cost and net realisable

value. Cost is determined on a weighted average basis.

Purchased goods in transit are carried at cost.

Finished goods produced or purchased are stated at the lower of cost and net realisable value. Cost is

determined under specific identification method and includes direct material and labour costs and a

proportion of manufacturing overheads. Work-in-progress is carried at lower of cost or net realisable value.

Work-in-progress comprises cost of infrastructural facilities in the process of installation at customers’ sites.

These are valued at cost paid or payable to sub-contractors.

17

m. Goodwill and other intangible assets

Purchased intangible assets, other than goodwill and intangible assets with finite lives, consist of

amounts allocated to customer relationships on acquisition of a business, acquisition of intellectual

property rights and acquired contract rights and are amortized on a straight line basis. The following

table summarizes the nature of intangibles and the estimated useful lives.

Nature of Intangibles Useful Lives

Customer-related intangibles 3-10 years

Technology-related intangibles 3-10 years

Acquired contract rights 10-12 years

Goodwill and intangible assets with indefinite useful lives resulting from a business combination

are not amortized but are tested for impairment annually or when significant events occur that

indicate that the fair value is less than its carrying value. TCS Limited determines fair value by

estimating the present value of future cash flows.

n. Investments

Equity securities and investments in mutual funds with readily determinable fair market values

are classified as available-for-sale securities and recorded at fair value. Unrealized gains and losses on

such securities, net of applicable taxes, are reported in other comprehensive income, a separate

component of shareholders’ equity. Realized gains and losses on sale of securities are recorded on the

trade date and are determined using the weighted average method.

Equity securities that do not have readily determinable market values are accounted at original

cost.

Declines in the fair values of investments below cost that are other than temporary are reflected

in earnings as realized losses. Fair values of equity securities carried at cost are estimated if there are

identified events or changes in circumstances that may have a significant adverse effect on the fair

value of the investment.

Debt securities for which management has the positive intent and ability to hold to maturity are

classified as held-to-maturity securities and are reported at amortized cost.

The Company does not have any securities classified as trading.

o. Property and equipment

Property and equipment are stated at cost, less accumulated depreciation. TCS Limited does not

depreciate freehold land. Depreciation is provided for all other property and equipment so as to

expense the cost over their estimated useful lives at the following basis and rates:

18

Type of Asset Method Rate

Buildings Written down value 5%

Computer equipment Straight line 50%

Automobiles Written down value 25.89%

Plant and machinery Straight line 33.33%

Furniture and fixtures Straight line 100%

Office equipment Written down value 13.91%

Depreciation is not provided on capital work in progress until construction and installation are

complete and the asset is ready for its intended use.

p. Impairment or disposal of long-lived assets

Whenever events or circumstances indicate that the carrying amount of long-lived assets may not

be recoverable, TCS Limited subjects such assets to a test of recoverability based on the undiscounted

cash flows from use or disposition of the asset. If the asset is impaired, TCS Limited recognizes an

impairment loss as the difference between the carrying value of the asset and fair value less cost to

sell. As of March 31, 2005 and 2006, none of TCS Limited’s long-lived assets was considered impaired.

q. Compensated absences

TCS Limited provides for the cost of vacation earned but not taken based on the number of days

of carry forward entitlement at each balance sheet date.

r. Earnings per share

Basic earnings per share is computed by dividing income from continuing operations by the

weighted average number of equity shares outstanding during the period. Diluted earnings per share is

computed using the weighted average number of equity and dilutive equity equivalent shares

outstanding during the period, using the treasury stock method for options, except where the results

would be anti-dilutive.

s. Comprehensive Income

TCS Limited reports comprehensive income in accordance with SFAS No.130, Reporting

Comprehensive Income. Accounting principles generally require that recognized revenue, expenses,

gains and losses be included in net income. Unrealized gains and losses on available-for-sale securities,

translation adjustments arising on the consolidation of foreign subsidiaries and net income are

components of comprehensive income.

t. Segment information

TCS Limited operates in three identified geographic reportable segments, namely (1) the

Americas, (2) Europe and (3) India. All other operating segments do not meet the quantitative

thresholds for disclosure. Segment-wise information has been provided in Note 26.

19

u. Derivative Financial Instruments

TCS Limited uses foreign currency option contracts as well on forward contracts to manage its

exposure to foreign exchange. The Company recognizes the outstanding contracts at the fair values.

The option contracts are designated and documented as hedges at the inception of the contract. The

effectiveness of option contracts to reduce the risk associated with the exposure being hedged is

assessed and measured at inception and on an ongoing basis. Any amounts excluded from the

assessment of hedge effectiveness, as well as the ineffective portion of designated hedges are

reported in earnings immediately.

Changes in fair value of derivative instruments designated and qualifying as hedges are either

reported in earnings or other comprehensive income in shareholders’ equity. Fair value adjusted on

these instruments are recognized as a component of the other comprehensive income in the

shareholder’s equity and are reclassified into earnings when related hedge item impact earnings.

Changes in fair value of derivative financial instruments that is not designated as a hedge are recorded

immediately in earnings.

When the financial instrument is terminated or settled prior to the expected maturity or

realization of the underlying item, hedge accounting is discontinued prospectively. Gains or losses from

changes in fair value of discontinued derivative instruments are recognized in earnings when the

hedged transaction occurs. Fair value adjustments, recognized for cash flow hedges after settlement or

termination, continues to be reported in accumulated and other comprehensive income until the

related hedged items impact earnings. For anticipated transactions that are no longer probable,

recognized fair value adjustments within accumulated and other comprehensive income are reported

immediately in current earnings.

v. New Accounting Pronouncements

TCS Limited adopted EITF No.00-21, Revenue Arrangements with Multiple Deliverables on April 1,

2004 with no material effect on the results of operations.

In December 2004, the Financial Accounting Standards Board (FASB) revised SFAS No.123 (SFAS

No.123R, Share-based payments) requiring companies to record share-based payment transactions as

compensation expense at fair market value. TCS Limited recognizes stock based compensation expense

at fair value.

In December 2004, the FASB issued SFAS No.153, Exchanges of Non-monetary Assets, an

amendment of APB Opinion No.29, Accounting for Non-monetary Transactions, is based on the principle

that exchanges of non-monetary assets should be measured based on the fair values of the assets

exchanged. SFAS No.153 amends opinion No.29, eliminating the exception to fair value accounting for

non-monetary exchanges that do not have commercial substance. A non-monetary exchange has

commercial substance if the future cash flows of an entity are expected to change significantly as a

result of the exchange. The statement is effective for non-monetary asset exchanges occurring in fiscal

periods beginning after June 15, 2005. TCS Limited does not expect this statement to have a material

effect on the financial statements.

20

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections which

replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in

Interim Financial Statements and changes the requirements for the accounting for and reporting of a

change in accounting principle. It also applies to changes required by an accounting pronouncement in

the unusual instance that the pronouncement does not include specific transition provisions. This

statement requires retrospective application to prior periods’ financial statements of changes in

accounting principle, unless it is impracticable to determine either the period-specific effects or the

cumulative effect of the change. When it is impracticable to determine the period-specific effects of an

accounting change on one or more individual prior periods presented, this statement requires that the

new accounting principle be applied to the balances of assets and liabilities as of the beginning of the

earliest period for which retrospective application is practicable and that a corresponding adjustment

be made to retained earnings for that period rather than being reported in an income statement.

When it is impracticable to determine the cumulative effect of applying a change in accounting

principle to all prior periods, this statement requires that the new accounting principle be applied as if

it were adopted prospectively from the earliest date practicable. This statement also redefines

restatement as the revising the previously issued financial statements to reflect the correction of an

error. This statement shall be effective for accounting changes and corrections of errors made in fiscal

years beginning after December 15, 2005. TCS Limited is evaluating the effect of this statement on the

financial statements.

In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial

Instruments (“ FAS 155”), which amends FASB Statement No. 133 and FASB Statement No. 140, and

improves the financial reporting of certain hybrid financial instruments by requiring more consistent

accounting that eliminates exemptions and provides a means to simplify the accounting for these

instruments. Specifically, FASB Statement No. 155 allows financial instruments that have embedded

derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its

host) if the holder elects to account for the whole instrument on a fair value basis. FAS 155 is effective

for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that

begins after September 15, 2006. The Company does not expect the adoption of FAS 155 to have

material effect on financial statements.

4. Acquisitions

In May 2005, TCS Limited acquired the entire third-party equity interest in Swedish Indian IT Resources

AB (SITAR) for a cash consideration of Rs.215.3 million. The fair value of net assets acquired was Rs.215.3

million. Rs.177.6 million was assigned to customer relationships in Sweden.

In October 2005, TCS Limited, through its wholly-owned subsidiary, acquired the entire third-party

equity interest in Sydney based Financial Network Services (Holdings) Pty Ltd (FNS), a core banking services

provider, for a cash consideration of Rs. 1,102.7 million. A fair value of Rs.1,083.4 million has been

attributed to definite lived technology-based intangible assets such as computer software.

In November 2005, TCS Limited, through its wholly-owned subsidiary, acquired the entire third-party

equity interest in Chile based Comicrom S.A., a BPO services provider for a cash consideration of Rs. 1,041.1

million. The share purchase agreement provides for additional consideration, contingent upon certain

conditions being met, including achieving specified earning levels in the acquired business in future years.

21

The additional contingent consideration payable to the seller is subject to a maximum amount of Rs.2,706.8

million. The contingent consideration will be recorded as additional purchase consideration when the

contingency is resolved and the consideration is paid or becomes payable.

In January 2006, TCS Limited subscribed to 51% of the share capital of C Edge Technologies Limited, a

company formed to provide Information Technology enabled services and solutions.

In March 2006, TCS Limited, through its subsidiary Diligenta Limited (“Diligenta”) acquired, on a going

concern basis certain businesses of Pearl Group Services Limited (“Pearl”) for a cash consideration of

Rs.4,261.9 million. Pearl has a minority interest of 24% in Diligenta. TCS Limited has a call option to buy

this minority interest of 24% at a fixed price at the end of 4 years, and Pearl Limited has a put option to

sell the shares to TCS Limited on the same terms. An additional consideration of Rs.1,345.9 million has been

recorded, and TCS Limited has consolidated 100% of Diligenta, at inception of this arrangement. The

acquisition included specified insurance contracts and claim administration assets and assets including

goodwill and know-how. The transfer of contracts and employees will be effective from April 1, 2006. The

allocation of the purchase price to specific assets and liabilities would be based on an independent outside

appraisal, which is expected to be finalised in fiscal 2007.

Based on a preliminary evaluation, the Company has allocated the fair value of purchase consideration

to definite-lived acquired contract rights (right to provide processing services to customers acquired directly

or indirectly through acquisition), and goodwill.

Purchase consideration paid for these acquisitions has been allocated as follows:

SITAR FNS Comicrom Diligenta

(In Millions)

Net assets acquired, at fair value

Cash and cash equivalents Rs.0.2 Rs.16.1 Rs.4.7 Rs.–

Property and equipment 2.2 24.5 70.7 –

Other current assets 73.9 187.7 357.5 –

Intangible assets 177.6 1,083.4 – 2,785.4

Investments – – 122.8 –

Other non-current assets – 101.8 0.2 1,278.6

Other current liabilities (net) (38.6) (310.8) (201.9) –

Minority Interest – – (0.3) –

Other non current liabilities – – (41.6) –

Fair value of net assets on date of acquisition Rs.215.3 Rs.1,102.7 Rs.312.1 Rs.4,064.0

Goodwill – – 729.0 1,543.8

Purchase consideration Rs.215.3 Rs.1,102.7 Rs.1,041.1 Rs.5,607.8

Proforma information has not been included, as the effect of these acquisitions on the Company’s

consolidated results of operations is not considered to be material.

In February 2006, TCS Limited acquired TIL and merged TIL into TCS Limited. TCS Limited issued

6,880,421 shares at par to Tata Sons Limited and its controlled entities and 2,310,019 shares with market

value of Rs.2,964.9 million to the minority shareholders. In connection with this acquisition TCS Limited has

22

recognized goodwill of Rs.1,783.1 million, intangible assets of Rs.95.9 million. Property and equipment has

been considered at fair value and the value of land and buildings have been increased by Rs.153.1 million. A

deferred tax liability of Rs. 43.8 million has also been recognized.

As discussed in Note 2, the accompanying financial statements include the impact of acquiring TIL and

the contribution of TCS Division.

5. Concentrations of credit risk

Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly

affect groups of counter parties whose aggregate credit exposure is material in relation to TCS Limited’s

total credit exposure.

TCS Limited has a customer concentration of risk, as illustrated in the table below showing the

aggregated accounts receivable and unbilled revenues for five largest customers as of March 31, 2005 and

2006, respectively.

TCS Limited’s exposure to other customers is diversified, and no other single customer explains more

than 1.8% and 1.5% of outstanding accounts receivable and unbilled revenues at March 31, 2005 and 2006,

respectively.

As of March 31, 2005

(In millions, except percentages)

Total accountsreceivable and

unbilled revenues Percentage

Customer C Rs.1,414.7 5.8

Customer L 603.0 2.5

Customer G 525.5 2.1

Customer F 502.7 2.1

Customer B 458.6 1.9

Others 21,003.4 85.6

Total Rs.24,507.9 100.0

As of March 31, 2006

(In millions, except percentages)

Total accountsreceivable and

unbilled revenues Percentage

Customer C Rs.2,152.3 5.7

Customer P 1,303.5 3.5

Customer S 710.8 1.9

Customer H 686.7 1.8

Customer J 574.2 1.5

Others 32,074.6 85.6

Total Rs.37,502.1 100.0

23

TCS Limited has a geographic concentration of credit risk, with exposure to customers based in the

United States of America comprising 46.5% and 45.1% of the aggregate of accounts receivable and

unbilled revenues as of March 31, 2005 and 2006, respectively.

TCS Limited also has a geographic concentration of credit risk relating to cash and cash equivalents held

with banks in the United States of America comprising 14.5% and 18.7% of the balances as of March 31,

2005 and 2006, respectively.

6. Inventories

Inventories consist of the following:As of March 31, As of March 31,

2005 2006

(In millions)

Stores and spares Rs.61.4 Rs.107.1

Raw materials 220.2 87.9

Goods in transit 84.4 80.0

Education and training material - 8.8

Computer equipment held for resale 304.7 506.7

Work-in-progress 34.7 15.8

Total Rs.705.4 Rs.806.3

7. Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:


(In millions)

Prepaid expenses Rs.1,940.2 Rs.2,598.9

Advances to suppliers 269.4 398.6

Employee advances 988.0 1,368.8

Current portion of employee loans (net of allowances ofRs.32.1 million and Rs.60.1 million, respectively) 197.5 175.7

Deposits 375.1 276.1

Advance income taxes 582.1 1,284.3

Deferred income taxes 198.7 359.4

Foreign currency derivative assets 259.8 157.8

Other current assets (net of allowances of Rs.66.5 millionand Rs.53.2 million, respectively) 848.6 707.2

Total Rs.5,659.4 Rs.7,326.8

24

8. InvestmentsInvestments consist of the following:


(In millions)Investments available-for-sale, at fair value Rs.4,568.6 Rs.6,905.0Investments held to maturity, at amortized cost 152.9 140.9Investments at cost, net 38.9 40.2

Total Rs.4,760.4 Rs.7,086.1

Information on unrealized gains and losses on available-for-sale investments at March 31, 2005 and2006 is as follows:

Gross GrossAmortized unrealized unrealized

Available-for-sale securities: Cost gains losses Fair value

(In millions)As of March 31, 2005:

Investments in mutual funds Rs.4,550.3 Rs.10.5 Rs. (0.1) Rs.4,560.7Quoted equity security 21.8 – (13.9) 7.9Investments in debt securities – – – –

Total available-for-sale-securities Rs.4,572.1 Rs.10.5 Rs.(14.0) Rs.4,568.6

As of March 31, 2006:Investments in mutual funds Rs.6,764.3 Rs.83.6 Rs.– Rs.6,847.9Quoted equity security 47.7 – – 47.7Investments in debt securities 9.4 – – 9.4

Total available-for-sale-securities Rs.6,821.4 Rs.83.6 Rs.– Rs.6,905.0

Information on unrealized gains and losses for held to maturity investments is as follows:

Gross GrossFair value unrecognized unrecognized Amortized

Held to Maturity securities: gains losses Cost

(In millions)As of March 31, 2005:

Investments in debt securities Rs.67.5 Rs.1.0 Rs.(1.4) Rs.67.9

Investments in preference securities 84.7 – (0.3) 85.0

Total held to maturity securities Rs.152.2 Rs.1.0 Rs.(1.7) Rs.152.9

As of March 31, 2006:

Investments in debt securities Rs.52.6 Rs.0.2 Rs.(3.5) Rs.55.9

Investments in preference securities 82.6 – (2.4) 85.0

Total held to maturity securities Rs.135.2 Rs.0.2 Rs.(5.9) Rs.140.9

The contractual maturity of held to maturity securities as of March 31, 2006 is as follows:

25

Year ending March 31, Debt securities Preference securities

(In Millions)

2007 Rs.6.2 Rs.–

2008 9.1 50.0

2009 – 35.0

2010 – –

2012 2.8 –

2013 19.3 –

2014 17.5 –

2018 1.0 –

Total Rs.55.9 Rs.85.0

Information on equity investments without readily determinable market values is as follows:

Securities carried at cost : In millions


Cost Rs.101.9

Less: Other than temporary impairment 63.0

Total securities carried at cost, net Rs.38.9


Cost Rs.40.2

Less: Other than temporary impairment –

Total securities carried at cost, net Rs.40.2

Dividends on investments for three-year period ended March 31, 2004, March 31, 2005 and March 31,

2006 were Rs.63.2 million, Rs.48.7 million and Rs.181.7 million, respectively.

The proceeds and gross realized gains from sale of available-for-sale securities in fiscal 2004 were

Rs.985.2 million and Rs.3.7 million, respectively.

The proceeds and gross realized gains from sale of available-for-sale securities were Rs.1,856.2 million

and Rs.20.2 million, respectively in fiscal 2005. Unrealized gain of Rs.6.5 million was reclassified from

accumulated other comprehensive income to earnings on sale of these securities.

The proceeds and gross realized gains from sale of available-for-sale securities for fiscal 2006 were

Rs.84,898.8 million and Rs.30.5 million, respectively. Unrealized gain of Rs.28.7 million was reclassified from

accumulated other comprehensive income to earnings on sale of these securities.

In fiscals 2005 and 2006, securities at cost aggregating Rs.63 million and Rs.Nil have been impaired and

the impairment loss recognized in earnings. These securities have been impaired due to significant decline

in the financial condition of the investees.

26

9. Property and equipment

Property and equipment by asset category is as follows:


(In millions)

Land and buildings Rs.7,780.4 Rs.9,357.4

Computer equipment 4,067.5 6,002.3

Automobiles 738.1 836.7

Plant and machinery 239.7 912.0

Furniture, fixtures and office equipment 3,985.0 5,211.7

Property and equipment, at cost 16,810.7 22,320.1

Less: Accumulated depreciation 6,415.3 9,951.3

10,395.4 12,368.8

Capital work-in-progress 985.4 2,702.7

Property and equipment, net Rs.11,380.8 Rs.15,071.5

Depreciation expense was Rs.1,317.4 million, Rs.1,706.9 million and Rs. 2,731.3 million in fiscal years2004, 2005 and 2006, respectively.

Included in property, plant and equipment are the following assets taken on capital lease:


(In Millions)Computer Equipment Rs.1.4 Rs.61.4

Less: Accumulated depreciation 0.7 7.5

Total Leased property, net Rs.0.7 Rs.53.9

10. Intangible assetsForeigncurrency Net

Gross Exchange Accumulated carryingcost Additions (loss)/gain amortization value

(In millions)


Customer-related intangibles Rs.– Rs.103.9 Rs.(5.1) Rs.15.1 Rs.83.7

Technology-related intangibles – – – – –

Others – 19.7 – 1.6 18.1

Total Rs.– Rs.123.6 Rs.(5.1) Rs.16.7 Rs.101.8


Customer-related intangibles Rs.103.9 Rs.512.9 Rs.(13.7) Rs.95.6 Rs.507.5

Technology-related intangibles – 843.9 (49.5) 36.2 758.2

Acquired contract rights – 2,785.4 – – 2,785.4

Others 19.7 – – 8.2 11.5

Total Rs.123.6 Rs.4,142.2 Rs.(63.2) Rs.140.0 Rs.4,062.6

27

The estimated amortization for each of the five fiscal years subsequent to March 31, 2006 is as

follows:

Year ending March 31, Amortized Cost

(In millions)

2007 Rs.484.6

2008 483.0

2009 472.8

2010 385.5

2011 380.3

Thereafter 1,856.4

Total Rs.4,062.6

Amortization expense was Rs.Nil, Rs.16.7 million and Rs.123.3 million for the three-year period ended

March 31, 2004, 2005 and 2006, respectively.

11. Other non-current assets


(In millions)

Non-current portion of employee loans Rs.1,278.4 Rs.718.1

Prepaid rent 436.1 600.0

Rent deposits 682.3 1,118.1

Deferred income taxes 414.8 1,553.6

Restricted cash 86.3 20.3

Others 436.8 978.0

Total Rs.3,334.7 Rs.4,988.1

12. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:


(In millions)

Accounts payable, including retentions Rs.3,133.3 Rs.4,308.1

Accrued expenses 1,696.6 755.7

Accrued payroll 3,299.2 3,539.2

Income taxes payable 1,090.3 1,181.0

Indirect taxes payable 907.3 1,942.2

Deferred income taxes 749.5 861.0

Other current liabilities 1,752.0 4,821.8

Total Rs.12,628.2 Rs.17,409.0

28

13. Income taxes

The income tax expense consists of the following:


(In millions)

Current income tax expense:

Domestic Rs.1,111.8 Rs.2,079.2 Rs.2,343.5

Foreign 1,611.1 2,354.5 2,480.6

Total Rs.2,722.9 Rs 4,433.7 Rs.4,824.1

Deferred income tax expense:

Domestic Rs.46.3 Rs.(7.6) Rs.(64.9)

Foreign 145.5 372.7 229.9

Total Rs.191.8 Rs.365.1 Rs.165.0

Total income tax expense Rs.2,914.7 Rs.4,798.8 Rs.4,989.1

The reconciliation of estimated income tax expense at Indian statutory income tax rate to income tax

expense reported in statements of income is as follows:


(In millions)

Income before income taxes Rs.19,855.9 Rs.26,101.6 Rs.34,083.8

Indian statutory income tax rate 35.875% 36.592% 33.660%

Expected income tax expense 7,123.3 9,551.1 11,472.6

Tax effect of:

Adjustments to reconcile expected income

tax expense to reported income tax expense:

Tax effect of permanent differences:

Tax holidays and income exempt from tax (5,993.8) (8,389.8) (9,131.1)

Branch profit tax in foreign jurisdictions 1,623.8 2,461.9 2,253.1

Compensation expense under ESPS scheme

and cash grant – 988.4 76.7

Rate differences on capital gain and

exemption on sale of equity accounted

affiliates (48.2) (483.9) –

Tax on transfer of foreign subsidiary and

overseas branches – 577.5 –

Others, net 209.6 93.6 317.8

Total income tax expense Rs.2,914.7 Rs.4,798.8 Rs.4,989.1

29

Under Section 10(A) of the Indian Income Tax Act, 1961, TCS Limited is entitled to tax holidays for its

various Software Technology Park (STP) units located across India. These tax holidays are available for a

period of ten fiscal years from the date of commencement of operations. These holidays expire between

fiscals 2006 and 2009.

In fiscal 2004, the TCS Division was entitled to a tax deduction under section 80 HHE of the Indian

Income Tax Act, 1961 for software exports. Under this section, the TCS Division was entitled to a tax

deduction of up to 100% of profit derived from export business subject to certain conditions. Tax

exemption on export profits under this incentive scheme expired on March 31, 2004.

In connection with the Transfer of the TCS Division to TCS Limited, TCS Limited assumed tax obligations

resulting from the Transfer in all jurisdictions where the Transfer resulted in tax obligation. TCS Limited

incurred Rs.577.5 million in taxes related to capital gains, deemed dividends and other tax consequences.

These additional taxes have been recorded as expense in fiscal 2005.

In connection with the TIL acquisition, TCS Limited is entitled to the tax assets and liabilities of TIL. In

certain countries, TIL’s branches were merged into TCS Limited’s existing branches and such mergers

provided additional tax benefit in the amount of Rs.237.2 million to TCS Limited. These tax benefits have

been included in the deferred tax assets of the Company.

The tax effects of significant temporary differences are as follows:


(In millions)

Tax Effect of:

Deductible temporary differences:

Retirement benefits and compensated absences Rs.164.8 Rs.276.6

Allowances for doubtful receivables, loans and advances 103.6 201.1

Provision for diminution in value of investments 97.4 97.4

Operating loss carry forward 306.2 250.5

Intangibles and Goodwill – 1,278.6

Unrealized loss on available-for-sale securities 7.9 –

Others 74.3 25.0

Deferred tax asset 754.2 2,129.2

Less: Valuation allowance 140.7 216.2

Net deferred tax asset Rs.613.5 Rs.1,913.0

Current Rs.198.7 Rs.359.4

Non-current 414.8 1,553.6

Total Rs.613.5 Rs.1,913.0

30

Taxable temporary differences:

Property and equipment Rs.123.7 Rs.117.5

Branch profit tax 650.6 659.1

Undistributed earnings of subsidiaries and affiliates 98.7 262.9

Unrealized gain on available-for-sale securities – 27.7

Others 0.2 (35.8)

Deferred tax liability Rs.873.2 Rs.1,031.4

Current Rs.749.5 Rs.861.0

Non-current 123.7 170.4

Rs.873.2 Rs.1,031.4

A valuation allowance has been recognized on deferred tax asset relating to impairment of certain

securities carried at cost, which TCS Limited does not intend to sell in the foreseeable future and operating

losses of certain subsidiaries and branches that are making losses and do not expect to return to tax

profitability in near future.

Under the Indian Income Tax Act, 1961, unabsorbed business losses expire eight years after the year in

which they originate. In respect of certain foreign subsidiaries business losses can be carried forward

indefinitely unless there is a substantial change in the ownership.

Deferred tax liability on undistributed earnings of a foreign subsidiary amounting to Rs 242.2 million

has not been recognized, as it is the intention of TCS Limited to reinvest the foreign earnings for an

indefinite period of time. TCS Limited has not provided deferred tax liability on Rs.1,072.5 million of

undistributed earnings of subsidiaries, as it is the company’s policy to indefinitely reinvest these earnings in

subsidiaries operations. Quantification of the deferred tax liability, if any, associated with indefinitely

reinvested earnings is not practicable.

Tax effects allocated to each component of other comprehensive income are as follows:

As of March 31, As of March 31, 2005 2006

(In Millions)

Unrealized (loss) / gain on available-for-sale securities Rs.(47.5) Rs.35.6

14. Unearned and deferred revenues

Unearned and deferred revenues consist of the following:


(In millions)

Advance billings and customer advances Rs.1,877.4 Rs.5,063.3

Deferred maintenance revenues 108.3 254.0

Total Rs.1,985.7 Rs.5,317.3

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15. Short-term borrowings

Short-term borrowings consist of the following:


(In millions)

Foreign currency bank loans Rs.870.5 Rs.43.5

Cash credits and overdrafts 617.7 385.9

Commercial papers 300.0 50.0

Other short-term borrowings 350.0 500.0

Total Rs.2,138.2 Rs.979.4

Available lines of credit Rs.25,657.4 Rs.22,040.3

Total borrowings outstanding:

Maximum amount outstanding Rs.7,942.0 Rs.2,136.8

Average amount outstanding Rs.5,239.2 Rs.918.3

Weighted average interest rate 3.0% 6.1%

Foreign currency loans, cash credits and overdrafts are secured against accounts receivable and

inventories. All other borrowings are unsecured.

16. Other non-current liabilities

Other non-current liabilities consist of the following:


(In millions)

Deferred income taxes Rs.123.7 Rs.170.4

Long term debt 0.8 1,486.8

Others 373.1 291.6

Total Rs.497.6 Rs.1,948.8

17. Shareholders’ Equity

Authorized and issued share capital

Stock-split

On May 5, 2004, the shareholders of TCS Limited approved a stock split by reduction in the par value of

equity shares from Rs.10 per share to Re.1 per share. Consequently, the authorized number of shares

increased from 40 million to 400 million and the issued number of shares increased from 36,440,002 to

364,400,020. On that date, the shareholders approved a further increase in the authorized number of

shares from 400 million to 600 million.

32

On May 5, 2004, the shareholders approved a bonus issue of 91,100,009 equity shares. The bonus issue

is in the nature of a stock split effected in the form of a stock dividend with one additional share was

issued for every four shares held. In accordance with Indian law, Rs.91.1 million has been capitalized from

retained earnings as share capital.

Computation of earnings per share has been adjusted retroactively for fiscal 2004.

Initial Public Offer

On August 19, 2004, Tata Consultancy Services Limited issued and allotted 22,775,000 equity shares of

Re.1 each for cash consideration of Rs.850 per share, under an Initial Public Offer. These shares are listed

on BSE and NSE.

TIL Shareholders’ equity

TIL Shareholders’ equity comprises the following:

As of March 31,2005

(In Millions)

Equity shares; Par value Rs.10; authorized 19,000,000 shares;

issued and fully paid up 18,380,880 shares Rs.183.8

Equity shares held by a controlled Trust: 342,753 fully paid up equity shares (1.4)

Additional paid-in-capital 35.7

Retained earnings 3,062.2

Accumulated other comprehensive income 12.2

Total Rs.3,292.5

18. Employee Stock Purchase Scheme

On September 17, 2004, Tata Consultancy Services Limited issued offer letters to eligible employees

granting each identified employee an irrevocable offer to acquire a specified number of equity shares of

Tata Consultancy Services Limited at a price of Re.1 per share, pursuant to an Employee Stock Purchase

Scheme (ESPS). The Securities and Exchange Board of India Guidelines on ESPS stipulates a lock-in period of

one year from the date of allotment of these shares. The ESPS was approved by the shareholders on

September 28, 2004 and 1,827,400 and 12,380 equity shares were allotted on September 29, 2004 and

October 21, 2004, respectively. The compensation expense related to the grants of these equity shares

have been measured at the market value at the grant date and accordingly Rs.1,864.4 million has been

recognized as compensation expense.

TIL, prior its acquisition by TCS Limited had an Employee’s Share Participation Trust (ESPT) for the

benefit of its employees. The ESPT purchased TIL shares (through a loan provided by TIL to the EWT). In the

years prior to the merger with TCS Limited, the ESPT granted/distributed 396,690 number of shares to TIL

employees. The ESPT was dissolved in January 2006 owing to the impending merger of TIL with TCS. The

accompanying financial statements include the expense of these share grants and distribution on

33

dissolution, which have been recognized at fair value of the underlying shares, in the amount of Rs.3.9

million, Rs.8.2 million and Rs.141.3 million for the years ended March 31, 2004, 2005 and 2006, respectively.

In addition to the share grants and distribution in course of its dissolution, the ESPT also had other assets

that were distributed to the employees. These asset distributions amounted to Rs.101.7 million of

compensation expense recorded in the year ended March 31, 2006.

Year ended Weighted Year ended Weighted Year ended WeightedMarch 31, Average March 31, Average March 31, Average

2004 Exercise 2005 Exercise 2006 ExercisePrice (Rs) Price (Rs) Price (Rs)

Outstanding at thebeginning of the year 143,800 224.00 189,828 260.03 246,218 286.99

Granted during the year 96,370 293.00 100,550 381.81 – –

Forfeited during the year (31,995) 236.22 (8,570) 237.53 (24,091) 319.14

Exercised during the year (18,347) 224.00 (35,590) 230.96 (222,127) 313.41Outstanding at the endof the year 189,828 260.03 246,218 286.99 – –

Grant II Grant III Grant II Grant III(Modified) (Modified)

Date October 24, 2003 February 2, 2005 January 17, 2006 January 17, 2006

Fair value of option 171.81 185.40 487.40 397.53

Exercise price 293.00 383.00 293.00 383.00Description of the methodused to estimate fair value Black Scholes Black Scholes Black Scholes Black Scholes

Model of the method Option Pricing Option Pricing Option Pricing Option Pricingused to estimate fair value Model Model Model Model

Weighted average information

Risk-free interest rate 4.86% - 4.90% 6.47% - 6.53% 7.13% 7.13%

Expected life 3.5 - 4.5 years 3.5 - 4.5 years 0.02 year 0.02 year

Expected volatility 69.47%-70.85% 60.53%-63.73% 16.59% 16.59%

Expected dividends 2.36% 3.07% 3.06% 3.06%

19. Cash grant to employees by Tata Sons

On September 30, 2004, Tata Sons made a cash grant of Rs.845.1 million to certain employees of TCS

Limited who were not granted equity shares under ESPS. The grant has been recognized as compensation

expense in fiscal 2005 and has been credited to additional paid-in capital.

34

20. Retirement benefits

Gratuity

In accordance with Indian law, TCS Limited and its subsidiaries in India provide for gratuity, a defined

benefit retirement plan covering eligible employees in India. The plan provides for a lump sum payment to

vested employees at retirement, death while in employment or on termination of employment in an

amount equivalent to 15 to 30 days salary payable for each completed year of service. Vesting occurs upon

completion of five years of service. The measurement date used for determining retirement benefits for

gratuity is March 31.

The following table sets out the funded status of the Gratuity Plans and the amounts recognized in the

financial statements:

As of March 31, As of March 31, 2005 2006

(In millions)

Change in benefit obligations:

Benefit obligation, beginning of the year Rs.1,668.6 Rs.1,982.8

Plans assumed on acquisition of subsidiaries 4.4 11.3

Service cost 272.3 338.0

Interest cost 112.0 142.0

Actuarial loss 10.9 19.8

Benefits paid (85.4) (173.4)

Benefit obligation, end of the year Rs.1,982.8 Rs.2,320.5

Change in plan assets:

Fair value of plan assets, beginning of the year Rs. 1,350.5 Rs. 1,731.9

Actual return on plan assets 100.6 163.3

Employer contributions 365.7 513.8

Benefits paid (85.4) (173.4)

Plan assets obtained on acquisition of subsidiaries 0.5 11.3

Fair value of plan assets, end of the year Rs.1,731.9 Rs.2,246.9

Funded Status:

Deficit of plan assets over obligations (250.9) (73.6)

Unrecognized net actuarial loss 390.9 303.3

Prepaid benefit Rs.140.0 Rs.229.7

35

Net periodic gratuity cost consists of the following components:


(In millions)

Service cost Rs.231.3 Rs 272.3 Rs.338.0

Interest cost 102.2 112.0 142.0

Amortization of net actuarial loss 14.6 22.4 24.6

Expected return on plan assets (87.8) (109.8) (135.5)

Net periodic gratuity cost Rs.260.3 Rs.296.9 Rs.369.1

TCS Limited’s retirement benefit plans are administered by Life Insurance Corporation of India (LIC) and

TATA AIG Life Insurance Company Limited (TATA AIG). The plan assets mainly comprise contribution

deposits made to LIC and TATA AIG, which are invested in their general fund.

The assumptions used in accounting for the gratuity plan are set out below:

Year ended Year endedMarch 31, 2005 March 31, 2006

(%)

Discount rate 7.0 - 7.5 7.0 - 8.0

Rate of increase in compensation levels of covered employees 6.0 - 7.0 6.0 - 7.0

Rate of return on plan assets 7.0 - 7.5 7.0 - 8.0

Accumulated benefit obligation was Rs.821.6 million and Rs.811.5 million as of March 31, 2005 and

2006 respectively.

The estimated benefit payments expected to be paid for future service are as follows:

Year ending March 31, (In millions)

2007 Rs.257.6

2008 235.9

2009 274.6

2010 332.0

2011 418.7

2012-2016 2,580.7

The expected benefits are based on the same assumptions used to measure TCS Limited’s gratuity

obligations as of March 31, 2006. TCS Limited is expected to contribute Rs.370 million to gratuity funds in

fiscal 2007.

36

Defined contribution plans

Superannuation

In addition to gratuity benefits, all eligible employees are entitled to benefits under Superannuation, a

defined contribution plan. TCS Limited makes monthly contributions at 13% of annual basic salary for the

first five years of an employee’s service and at 15% from the fifth year onwards until retirement or

resignation of the employee. TCS Limited recognizes such contributions as an expense when incurred. TCS

Limited has no further obligation beyond its monthly contribution.

TCS Limited contributed Rs.535.5 million, Rs.693.6 million and Rs.227.1 million to the Employees’

Superannuation Fund in fiscals 2004, 2005 and 2006, respectively.

Provident fund

In accordance with Indian law, all eligible employees of TCS Limited and its subsidiaries in India are

entitled to receive benefits under the provident fund, a defined contribution plan in which both the

employee and employer contribute monthly at a determined rate (up to 12% of employee’s salary). TCS

Limited and its subsidiaries in India are liable for future provident fund benefits to the extent of its annual

contribution and any shortfall in fund assets based on government specified minimum rates of return, and

recognizes such contributions and shortfall, if any, as an expense in the year incurred.

TCS Limited contributed Rs.658.7 million, Rs.985.7 million and Rs.1,117.9 million to the Provident Fund in

fiscals 2004, 2005 and 2006, respectively.

Tata America International Corporation, a subsidiary, contributed Rs.3.6 million, Rs.9.4 million and

Rs.26.9 million in fiscals 2004, 2005 and 2006, respectively, to an employee profit sharing plan with 401(k)

feature.

21. Other non-operating income, net


(In millions)

Gain on sale of equity accounted affiliates Rs.167.0 Rs.1,322.4 Rs. –

Foreign exchange (loss) / gain, net (143.1) 542.9 (714.6)

Dividend income 63.2 48.7 181.7

Others, net 730.2 214.4 554.7

Total Rs.817.3 Rs.2,128.4 Rs.21.8

In fiscal 2004, TCS Limited sold its interest in Tata Infomedia Limited, an equity accounted affiliate. The

carrying amount of Tata Infomedia Limited was Rs.328.7 million and the sale proceeds were Rs.495.7

million.

In fiscal 2005, TCS Limited sold its interest in Intelenet Global Services Limited (IGSL), an equity

accounted affiliate. The carrying amount of IGSL was Rs.287.6 million and the sale proceeds were Rs.1,610

million.

37

22. Shipping and Handling Costs

Selling, general and administrative expenses for the years ended March 31, 2004, 2005 and 2006,

include shipping and handling costs of Rs.18 million, Rs.20.4 million and Rs.17.2 million respectively.

23. Leases

TCS Limited has leased property, equipment and automobiles under operating lease arrangements.

Operating lease rent expense was Rs.227.5 million, Rs.563 million and Rs.783.8 million in fiscals 2004, 2005

and 2006, respectively.

The following is a summary of future minimum lease rental commitments under non-cancelable

operating leases and capital leases:

Operating lease Capital lease

(In millions)

Year ending March 31,

2007 Rs.953.5 Rs.13.9

2008 758.3 10.4

2009 549.1 10.8

2010 348.2 11.7

2011 223.4 3.1

Thereafter 130.3 –

Total minimum lease commitments Rs.2,962.8 Rs.49.9

The capital lease arrangement is renewable at the option of the lessee.

24. Estimated fair value of financial instruments

The carrying amounts for cash and cash equivalents, accounts receivable, unbilled revenues, loans and

advances, accrued expenses and other current liabilities, income and deferred taxes and short-term

borrowings approximate their fair values due to the short term nature of these instruments. The carrying

values of other non-current assets and liabilities approximate their fair values.

Available-for-sale securities are carried at their fair values, which are generally based on market price

quotations.

Management uses its best judgment in estimating the fair value of its financial instruments; however,

there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial

instruments, the fair value are not necessarily indicative of all the amounts TCS Limited could have realized

in a sales transaction as of either March 31, 2005 or 2006. The estimated fair value amounts for the years

ended March 31, 2005 and 2006 have been measured as of the respective year ends, and have not been

re-evaluated or updated for purposes of these financial statements. The fair values of investments carried

at cost cannot be reliably estimated.

38

25. Derivative financial instruments

TCS Limited, in accordance with its risk management policies and procedures, enters into foreign

currency forward contracts to manage its exposure in foreign exchange rates. The counter party is

generally a bank. Foreign exchange forward contracts and currency options held by TCS Limited as of March

31, 2005 and 2006 were Rs.24,702.5 million and Rs.25,781.4 million, respectively. These contracts are for a

period between one and twelve months.

During the year ended March 31, 2006, TCS Limited has re-evaluated its risk management program

and hedging strategies in respect of forecasted transactions. Effective April 2005, upon completion of the

formal documentation and testing for effectiveness, TCS Limited has designated certain foreign currency

options in respect of forecasted transactions, which meet the hedging criteria, as cash flow hedges.

Exchange loss of Rs.110.4 million, an exchange gain of Rs.988.3 million and an exchange loss of Rs.408.5

million on foreign currency forward exchange contracts have been recognized in earnings in fiscals 2004,

2005 and 2006, respectively.

Net loss on derivative instruments of Rs.44.2 million recogni

financial statements prepared in accordance with us gaap ......see accompanying notes to...

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