Sweet Nothings: Why the Erstwhile Cadbury India May Have to Shell Out Rs 584 Crore to the Tax Authorities in India

Last year, in April 2014, the Indian subsidiary of Cadbury—a multinational British confectionary company—underwent a complete overhaul. This change of identity was a consequence of Cadbury’s global acquisition in 2010 by Kraft Foods— an American grocery manufacturing and processing conglomerate. In 2012, Kraft created Mondelez International for its snacks and confectionary business, which included Cadbury. As Cadbury India became Mondelez India in 2014, and the iconic “Cadbury House” on Peddar Road in Mumbai was sold to make way for an office at the more modern India Bulls Finance Centre in Parel, several news reports chronicled the transition. However, what most of these reports neglected to mention, were the show-cause notices that Mondelez India would be inheriting from its predecessor. These notices were issued in 2013 and 2014 by the Directorate General of Central Excise Intelligence (DGCEI)—the apex intelligence organisation that functions under the Central Board of Excise & Customs—for the alleged evasion of duty.

The adjudication of these show-cause notices was completed in March 2015. Nearly two years after the first notice was issued, the adjudicating authority, Parminder Singh Sodhi, the commissioner of the Central Excise department in Chandigarh heard the noticees and confirmed a duty demand of Rs 342.84 crore and a penalty of Rs 231.47 crore on Mondelez India. The company was also penalised for an amount of Rs 10.43 crore under section 11A of the Central Excise Act, 1944, that concerns itself with the recovery of duties not-levied, not-paid, short-levied, short-paid or erroneously refunded.

The DGCEI’s show-cause notices contested Cadbury India’s claims to excise duty exemptions through the second unit from 2010 to 2013, under a Central Board of Excise and Customs (CBEC) notification of 2003. This notification stated that if an industrial unit was set up in certain industrially backward states such as Himachal Pradesh, the unit could claim duty exemptions for a period of ten years starting from the date of commencement of commercial production. However, the notification had a clause that stated that the exemption would not be applicable on an industrial unit, unless it was functional before a certain date. In the case of Cadbury India, it was 31 March 2010.

In the second half of the last decade, the company established a manufacturing unit in Baddi, an industrial town in Himanchal Pradesh. This unit was set up on the same premises as its existing plant in the area that manufactured Bournvita and Cadbury Dairy Milk. The second unit had been set up primarily to produce Cadbury gems and Cadbury 5 Stars.

Sodhi denied the provision of exemptions to the second unit of Cadbury India, noting that it was located at the same address as the older one. The adjudication order that was issued in March 2015 concluded that the this second unit had not gotten the requisite approvals and clearances from the Himachal Pradesh State authorities, due to which it did not qualify as an independent new unit on or before the cut-off date of 31 March 2010.

The central excise adjudication order also confirmed penalties against individuals such as the former managing director of Cadbury India, Anand Kripalu who was charged with Rs 1 crore. The former executive director of the company, Jaiboy Phillips, who is now the director of operations at GlaxoSmithKline Consumer Healthcare; the former executive director Rajesh Garg who was, until recently, the global chief financial officer of Cipla and; the former vice president Sanjay Kurup were charged with Rs 25 lakhs each.

Anand Kripalu is now the chief executive officer and managing director at United Spirits Limited (USL)—an Indian spirits company—that was taken over by Diageo, a British multinational alcoholic beverages company, in July 2014. Kripalu was also inducted as a member of Diageo’s global executive committee. An internal probe into the books of USL was ordered by Diageo and resulted in Vijay Mallya, the former chairman of USL, being asked to step down from the board of USL for alleged financial irregularities in the company. USL and Vijay Mallya are now entangled in a legal battle with Anand Kripalu, who is representing Diageo in this controversy. Incidentally, Diageo itself faced a penalty by the US Securities and Exchange Commission (SEC) in 2011 for bribes allegedly paid in India, Thailand and South Korea.

In 2011, the SEC also started an investigation into the India operations of Kraft Foods. The enquiry, which is still underway, is attempting to investigate possible bribery charges against the second unit in Baddi, and is directly linked to the action taken by the Indian Central Excise authorities. In its quarterly filing for the period ending 31 March 2015, Mondelez India stated that, “As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are continuing to cooperate with the U.S. and Indian governments in their investigations of these matters, including through ongoing meetings with the U.S. government to discuss potential conclusion of the U.S. government investigation.”

In 2008, Cadbury India had first got this partly built second unit amalgamated with the unit in Baddi that was already functional. Cadbury’s first unit had started production in 2005. The company had already sought exemptions for the first unit, under both the income tax and central excise law. However, this exemption would have been available only till 2015. The second unit could claim these benefits for ten years from a later date.

A year later, it sought de-amalgamation so that the two units could exist as separate entities. The company received the permission to do so from the state government on 30 March 2010—a day before the second unit was meant to be functional for the company to claim an exemption. According to Sodhi, this de-amalgamation was subject to clearances that would be granted by the central and state government for specific projects. On 30 June 2009, the company had also filed a declaration with the jurisdictional central excise office claiming that commercial production had commenced in the second unit on 29 June 2009. During his adjudication, Sodhi rejected this claim.

To obtain all the clearances before 31 March 2010, Cadbury India engaged Deepak Chandel, who is the proprietor of Daksh Associates and Consultants—a company that operated in this case, as a local consultant for Cadbury India—in 2009. Chandel also owns Jyoti Rattan Marbles, a hardware company based in Baddi. During the course of its investigation, the DGCEI confirmed the involvement of Chandel who stated that he had “provided consultancy and liasoning services to the company for getting permissions and licenses from the HP Govt. Departments from 2009 to 4 March 2011 and had received payment of consultation of [sic] the same.”

In fact, in 2010, after taking over Cadbury India, Kraft Foods engaged an Indian law firm, AZB & Partners, that in turn roped in a forensic audit team from Ernst & Young (E & Y)—a global auditing and consulting firm—to ascertain whether the clearances obtained by Daksh Associates were in order or obtained through fraud or bribery.

The E & Y investigation was concluded in April 2011 and reported that in 2010, Cadbury India made payments of Rs 88 lakh to Daksh Associates and other vendors such as Dev Raj Dhiman—who had been appointed by Cadbury India to “smoothen the process of obtaining a transmission line for the unit.” From the total amount, Daksh Associates received a payment of over Rs 47 lakhs. These clearances would have been available to the company, even without the involvement of an external entity, for a few thousands, a mere fraction of the amount that it paid.

While the services of the other vendors who were associated with Cadbury India may have been genuine, during the DGCEI’s investigation, Anurag Kashyap, the associate director of Fraud Investigation and Dispute Services at E&Y, noted that Daksh Associates had not provided legitimate services to Cadbury India and that the company made suspicious payments to the consultants. This report found mention in the show-cause notice and has been relied upon in the adjudication order.

It emerged, in fact, that in the latter half of 2009; Cadbury India sought the services of lawyers outside the company, Laxmi Kumaran and Sridharan, for advice on availing the exemption of excise duty on the second unit. Internal emails among the senior members of the company, that were a part of the E & Y report, also indicate that some applications for clearances were still to be filed in as late as January 2010. An email from Rajesh Garg, the executive director of Cadbury India to Anand Kripalu, the former managing director of Cadbury India on 19 February 2010, mentioned that the chocolate from the first unit in Baddi was being moved to the second through a pipeline to start “trial runs” of the new line. According to the report, Garg further mentioned, “pumping chocolate from unit 1 to 2 is a cardinal sin per the whole concept.”

The adjudication order stated that the factory licence for the second unit was received on 28 July 2010, well after the cut-off date of the excise notification and more than a year after the company had claimed that this unit had begun operations. The certificate for the commencement of commercial production was found to have been applied for on 17 September 2010, although Cadbury India claimed that it had been filed on 30 March 2010. Since the deputy director of industries at Baddi had entered the diary noting for the application on 22 September 2010, the adjudicating commissioner concluded that the company had filed a back- dated application. This certificate for the commencement of production was given by Sudhir Kumar, the deputy director of industries, Himachal Pradesh on 14 January 2011, but was made effective from an earlier date on 30 March 2010. Sodhi penalised Kumar for this discrepancy. The adjudicating commissioner also recorded that internal emails and correspondence to the head office of the company conveyed that all the necessary licences and permissions for the second unit were not in place on 31 March 2010.

In his notice, Sodhi cited a number of invoices that were submitted to the excise department and carried the address of the second unit despite being allegedly issued by the older unit. Through these inconsistencies, Sodhi inferred that the SAP information system—a business operations software—used by Cadbury was manipulated.

After hearing the parties concerned, examining all the available evidence that was collected by the DGCEI and scrutinising the submissions made by the company, Sodhi concluded that the second unit did not exist as an independent unit before 31 March 2010.

Through the adjudication, Mondelez India argued that the licences and permissions had been sought for before 31 March 2010, even though they were issued later. The company further reiterated that the unit had, in fact, started production in June 2009. It invoked the doctrine of “relation back”—that the second unit had started commercial production without all the requisite licenses and approvals—since the efficacy of processes such as the approval of permissions was beyond its control. It further argued that the relevant notification provides for an exemption to a unit and not to a factory whose commercial production should have started before 31 March 2010.

The commissioner rejected this assertion after concluding that the permissions and licenses were back dated, and that the second unit did not appear to be functioning as a separate entity as of 31 March 2010.

On 3 June 2015, I contacted Sree Patel, the executive director, legal and government affairs at Mondelez India with a set of questions around the adjudication order. A day later, on 4 June, I received a response from Perfect Relations, a public relations company that represents Mondelez India:

“As a company, we promote a compliant and ethical corporate culture which includes adhering to all laws and regulations of the country we work in. The Company is examining the Commissioner’s Order and will challenge the same in appeal, as we firmly believe that we have correctly claimed exemption of excise duty.  We also firmly believe that our executives acted in good faith and within the law in the decision to claim excise benefit in respect of our plant in Baddi.

The issue relates to the applicability of excise exemption in respect of our Unit II of our Baddi plant, which has been manufacturing our much loved products since 2009.  The issue is one of interpretation and it will be inappropriate on our part to discuss the details externally at this time since the matter is sub-judice and in the legal domain.”

In this statement, Mondelez India did not respond to my questions on whether the company had initiated any internal action with reference to the E&Y report, which indicated deliberate misconduct by the employees of Mondelez India.