Indian Govt Says Cadbury Used Phantom Factory to Dodge $46m Taxes


Tuesday, March 05, 2013 / By Joe PALAZZOLO & Julie JARGON, WSJ

1.    Plant also a subject of US SEC Investigation.
2.    103 page Cadbury report is dated Feb. 28, 2013
3.    Tax authorities also investigating Royal Dutch Shell PLC and UK-based Vodafone Group


India has accused Cadbury PLC of dodging about $46 million in taxes by pretending to produce candy at a factory that didn't exist. A 103-page report by the country's tax authorities, which was reviewed by The Wall Street Journal, accuses Cadbury's Indian unit of manipulating invoices and other documents to get an exemption from taxes available to companies that began production in new plants in the northern Indian state of Himachal Pradesh by March 31, 2010.


The Directorate General of Central Excise Intelligence, which conducted the investigation, concluded that the Mondelez International Inc. MDLZ +1.11% unit's plant couldn't have existed by the deadline because the company hadn't received the necessary approvals from government agencies. Company statements indicate that Cadbury likely generated at least $700 million in sales from India last year. The directorate declined to comment on the report.


"We are in the process of reviewing the contents of the show-cause notice from the Excise Department and will respond to it under legal advice," Mondelez spokesman Michael Mitchell said by email. He said the company was cooperating fully with authorities in the investigation. "We firmly believe our executives acted in good faith and based on legal advice," he said.


The plant also is at the center of a U.S. Securities and Exchange Commission investigation into whether Cadbury bribed Indian officials. Mondelez said it cooperating with that investigation as well.


The tax case against Cadbury comes as India's government, under pressure to bridge a budget gap, is seeking billions of dollars from multinational companies it says haven't properly valued transactions with their Indian subsidiaries. Tax authorities in recent weeks served notices on oil company Royal Dutch Shell PLC and U.K.-based Vodafone Group PLC saying they owe higher taxes than they paid because they undervalued the transfer of shares between their Indian subsidiaries and other overseas units. The companies are contesting the claims.


The Cadbury report, dated Feb. 28, lists more than a dozen current and former Cadbury India Ltd. executives and government licensing officials as participants in the alleged plan. The report says they must respond to the allegations within 30 days and show why they shouldn't face financial penalties, which could run as high as the tax benefit Cadbury allegedly gained, in addition to the back taxes.


The report says Cadbury reprogrammed its accounting system so employees could submit false invoices, purchase orders and other documents that made it seem as if a new plant were operating, even though it couldn't have been doing so legally.


Cadbury didn't receive a certificate to begin commercial production at a new plant until Jan. 14, 2011, according to the report. The company didn't receive a factory license until May 29, 2010. Cadbury sold about $591 million in goods from that time through this January without paying taxes on them, according to the report.


A Cadbury executive who left the company for another job said the company initially intended to build a second plant in the Himachal Pradesh town but decided that would be too expensive. Instead, Cadbury added a second floor to its existing Baddi plant in 2009, the former executive said. When applying for licenses and approvals, Cadbury assigned the second floor the registration number of an adjoining plot so it would appear that the expansion was a separate plant eligible for the tax exemption, the former executive said.


The report names several Indian licensing officials who are "liable for penal action" for not disclosing Cadbury's alleged plan or for allegedly participating in it.

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