What’s anathema to one arm of the government appears to be kosher for another. Last December, a Mumbai income tax dispute resolution panel (DRP) allowed Mondelez India Foods, formerly Cadbury India, to claim tax breaks of about Rs 90 crore from 2010 at its chocolate factory in Baddi, Himachal Pradesh.
In March 2015, the central excise department had found that the company had tried to pass off part of its already existing factory as a second unit to claim excise benefits on offer under a promotional industrial policy.
The department claimed back duties of Rs 342 crore and fined Mondelez India Rs 242 crore for evasion. It also penalised top company officials for making fraudulent claims and some state government officials for helping them create documentation to show two distinct factory units existing before March 31, 2010, the sunset date of the industrial policy. The income tax DRP relied on the excise department order to allow the company tax waivers arguing that levying of excise duties showed that the company had actually commenced production in a separate unit. On March 25, 2015, the same day that the excise department had ordered penalties, an income tax assessment officer had denied the company tax benefits citing proceedings by excise officials. The DRP order overturned the assessment officer’s ruling saying that he did not get a chance to look at the excise department’s findings.
The DRP ruling comes at a time when the US stock market regulator Securities and Exchange Commission and the Department of Justice (SEC-DoJ) are investigating Mondelez International, the company’s American parent, over allegations that it paid bribes for government approvals and documentation to show the phantom factory at Baddi as real.
An ET investigation published in its edition of December 8, 2015, showed how Mondelez’ top management in the US knew about the irregularities at least three months before the SEC-DoJ began their probe. Earlier this year, the Central Bureau of Investigation started looking into the matter after the SEC-DoJ sent a formal request for assistance in its investigation.
Mondelez claimed income tax benefits based on the date on which it began commercial production of 5-Star bars, button-shaped Gems and Cadbury Dairy Milk chocolate from its so called Unit II. The DRP order states that commercial production of 5-Star and Gems began in June 2009 and Cadbury Dairy Milk from March 30, 2010. ET tried to contact the DRP members. One of them said he could not remember the Mondelez case specifically as he dealt with hundreds of cases. The other two could not be reached. In reply to an ET questionnaire, Mondelez said: “We have received a favorable order from the IT department in December 2015. A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success.”
The company’s internal communications, documents and the excise department’s order that ET reviewed, however, paint a fuzzy picture.
Barely six weeks before the day the company claims it began commercial production, its finance director Rajesh Garg wrote an email to CEO Anand Kripalu with the subject line “Will need 10mins to walk you thru a Baddi Unit 2 related issue/opportunity”.
Garg said in an email of February 19, 2010, that the supply chain folks were pushing to move some chocolate from Unit I to Unit II via a pipeline to start trial runs of the new line, till Unit II making gets up and running.
“Pumping chocolate from unit 1 to 2 is a cardinal sin per the whole concept,” Garg wrote. “We have worked a plan to let them do this. I want to bounce off the risk with you before I give them the green signal.” The government notification on income tax breaks to industrial units clearly mentions that a company cannot claim tax benefits by splitting up or reconstructing an existing unit. However, the company had applied for deamalgamating the Unit II and got a conditional permission from the government on March 16, 2010. In August 2009, two months after commercial production of 5-Star and Gems is supposed to have started, Jaiboy Phillips, the supply chain head of the company sent a detailed memo to split the production lines into two units to claim tax benefits.
“A tax position can be taken that Garuda [that makes 5-Star and Gems] and E4 [moulded chocolate] is a separate Unit (Unit-2) within the same factory. A key change required to our current design is to separate all common core processes akin to a common fountain and referred to as the “fountain principle”,” Phillips wrote in the memo seeking approval for a total expenditure, including capex, of 5.5 million pounds. In other emails as late as November 2010, officials were still discussing expansion of production lines at Baddi. “By modifying Everest to secure a bigger new line for Baddi the production start up appears to have been delayed from Q4 2009 to Oct 2010,” Carolyn Gibbs, the company’s audit chief, wrote in an email to colleagues seeking more information on the rationale for expansion at Baddi.
In March 2011, during the course of an internal investigation into allegations of bribery and forgery by company officials for securing government approvals, Mondelez asked its legal head Shivanand Sanadi whether a separate unit existed on June 29, 2009 or March 31, 2010. Sanadi pointed out the inconsistency in various documents and applications for government approvals. He also recommended to Mondelez to make full disclosure to the authorities. When contacted, Sanadi told ET that the external lawyers hired by Mondelez too had given a similar opinion in the context of Unit II, that they had noticed inconsistencies in various applications and approvals. He added that this statement had also been recorded in his submissions in legal proceedings of the excise department against Mondelez and in the excise order.
The DRP relied on the excise order showing that Mondelez received factory licence for Unit II on July 28, 2010, and hence eligible for tax breaks that year. The excise order states that the company had manipulated the date of filing of application for the licence “to mislead government authorities”. The order also says that the company “manipulated and fabricated invoices” and government logs for issuance of the commencement of production certificate. The DRP order makes no mention of the excise department’s detailed allegations. Mondelez has contested the excise order at the Customs, Excise and Service Tax Tribunal. Darian Stewart JerseyShare This