It's now the MNCs' turn to face up to the inquisitor's glare
FOR some multinational corporations (MNCs), the Indian summer has never been this hot. While not so long ago the government was dangling a carrot before them, it now seems quite willing to wield the stick. In the last few months, revenue authorities have slapped dozens of cases against high-profile MNCs. The list runs from Nestle to Sony, and Daewoo to Reebok.
When the Meerut Excise Commissioner-ate served a showcause notice on electronics goods giant Akai last month, it was the culmination of a long inquiry against Baron International, the company manufacturing the brand in India. The excise department claims Baron had underdeclared the value of its goods. The showcause notice asks the company to explain why it should not pay Rs 27.5 crore since it had evaded excise by undervaluing its goods before the authorities. The matter has now been referred to the Directorate General of Revenue Intelligence and the company's imports are being looked into by the authorities.
South Korean MNC Daewoo similarly faced the wrath of Delhi sales tax authorities last year after the department alleged the company was evading sales tax by showing on paper that its sales were being made from Haryana though the cars all along were being sold to residents of Delhi. The cars came almost Rs 30,000 cheaper because of the tax difference and were picked up soon enough. The company has denied the charge but sales tax officials insist the practice was deliberate on Daewoo's part. After much heat and dust, the company seems to have made its peace with the sales tax authorities.
Food products major Nestle was served a Rs 35 lakh claim from the Delhi excise collectorate when it was accused of wrongly claiming duty concessions on three of its packaged food products—Kulfi Mix, Rabri Mix and Kalakand Mix. Nestle refused to pay at first but eventually did, after authorities reportedly threatened to detain the raw material and finished products of the company at their Panipat plant. It's not only imports and dutiable excise that are being investigated. As MNCs battle it out with Indian competitors, sources say the revenue department is evincing keen interest in TV companies offering new TVs in exchange for old. Among the companies which have announced such schemes are Akai, Daewoo and Philips, and other Indian brands.
All these buyback offers are now being closely examined by officials (see box). On an average, a TV company charges about Rs 10,000 for its product, provided the customer brings his old set in working condition. Since the old TV has a price, the manufacturer, says a Finance Ministry official, ends up making Rs 10,000, in addition to the amount he sells the old set for. And since since the new TV is being sold for Rs 10,000 (against the normal price of around Rs 20,000), the value of the goods may have been underdeclared to excise authorities. Delhi Customs authorities have already served a showcause notice of Rs 43 crore on Sony. The allegation: Sony was importing not components, but completely knocked down (CKD) kits which were later assembled for sale. A company can import CKD kits for assembly and sale, but it has to pay a higher rate of duty, the same as it would pay for a product if it were imported as a whole. Delhi Customs claims Sony imported CKD kits and paid duty for components.
Sony has challenged the notice before the Customs' adjudicating authority and a final order is awaited. Yoshio Kubo, MD, Sony India, says the company owes "no duties/ taxes as claimed in the showcause notice". "The company will continue to hold discussions with the government to resolve the misunderstanding," he says.
In a similar case last year, the Customs detained consignments of Reebok and Nike sports shoes at the inland container depot in Tughlakabad, south Delhi. The authorities claimed the two companies were importing CKD kits for the manufacture of shoes. Like Sony, Reebok and Nike too have appealed to the adjudicating authority and a final decision is awaited.
Learning from their mistakes, Akai, claims the excise department, found an ingenious way out. Akai TV components are allegedly being imported by two companies—JR Consumer Electronics and Baron International. If Baron imported all the components and assembles them, it would have to pay a higher rate of duty. JR pays a lower rate on components since it's not assembling them into TVs, but selling them to an assembler. But if JR is actually a company of Baron International set up for paying lower duty, as the excise officials allege it is, then things could be different. To the tune of Rs 27.5 crore.
HOWEVER, Baron CEO Kabir Mulchandani vehemently denies his company has anything to do with JR Electronics, saying that the firm is promoted by Zafarbhai Rizvi, who is not related to him. He further questions the excise department's Rs 27.5 crore showcause notice since it gives away nearly Rs 10,000 per TV set in the buyback schemes. And even if one assumes that JR Electronics and Baron International are one and the same, Mulchandani says the excise duty would not work out to be more than Rs 5 crore.
Sources in the television industry say that a large number of MNCs are getting their products manufactured from local companies (after importing the components) and lending their brand name to the product. One TV manufacturer in Noida is said to be doing the job for at least four international brands. This helps MNCs in two ways: while they don't have to make capital investments in the short run, they also get their products manufactured at a cheap rate. Lending their own brand name gives them a near 100 per cent markup, which also means that the assessable value of the products is lower and the excise duty to be paid is lesser.
So is the verdict 'guilty'? The judgement will be pronounced only later. Meanwhile, the authorities have clearly decided to go hammer-and-tongs at MNCS.