India accuses Cadbury of evading $46 million in taxes

Cadbury likely generated $700 million in sales in India last year.

Bureau Report

WASHINGTON, DC: India has accused Cadbury, a division of the former Kraft Foods – now known as Mondelez International Inc., of dodging about $46 million in taxes by pretending to produce candy at a factory that didn’t exist.

A 103-page report by India’s tax authorities, which was reviewed by The Wall Street Journal, accuses Cadbury’s Indian unit of manipulating invoices and other documents to get a tax exemption available to companies that began production in new plants in Himachal Pradesh by March 31, 2010.

The Directorate General of Central Excise Intelligence, which conducted the investigation, concluded that the Mondelez International Inc. 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.

Cadbury’s expansion of an existing factory in the state was misrepresented as construction of a new factory eligible for the tax exemption, a former Cadbury executive said, reported the Journal.

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 is 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 and U.K.-based Vodafone Group 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, says the Journal.

The Cadbury report, dated February 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 January 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, the report says.

Since at least 2005, the company has been operating a plant in the industrial town of Baddi that produces the cocoa-based drink Bournvita and Cadbury Dairy Milk, a brand of milk chocolate.

U.S.-based Kraft Foods Inc. acquired Cadbury in January 2010, seeking to capitalize on the company’s strong position in emerging markets like India. The British company’s products include Dairy Milk, Creme Eggs, Dentyne chewing gum and Halls cough drops. Kraft Foods changed its name to Mondelez last October after spinning off its Kraft North American grocery business.

Mondelez doesn’t break out revenue by country, but when Kraft acquired Cadbury in 2010, Kraft said Cadbury’s sales in India were about $400 million. The company since has said that growth in India has been between 20% and 30% a year. That would put India revenue between $700 million and $800 million for last year, assuming annual growth of about 25%. Mondelez derived roughly 45% of its $35 billion in revenue from developing markets last year.

A separate probe by the SEC concerns possible violations of the Foreign Corrupt Practices Act, which bars U.S.-listed companies from paying bribes to foreign officials, according to Mondelez. An SEC spokesman declined to comment, said the Journal.

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