Using paper companies, the little-known pharma company’s CMD created huge wealth that was unearthed following a tip-off to the Income Tax department. The company’s modus operandi also finds a mention in the “White Paper of Black Money”
Mumbai-based Genom Biotech Pvt Ltd and its promoter and directors may not be known in their neighbourhood but their modus operandi of using paper companies abroad for creating wealth has found mention in the “White Paper on Black Money”, prepared and submitted by the Indian government in the Parliament.
Genom Biotech is manufacturer and exporter of pharmaceutical products. It is promoted by Binod Kumar, who is also the company's chairman and managing director. The company is operating in Ukraine, Cyprus and UK and claimed a huge amount for advertising and marketing expenses for marketing its products in these countries. It claimed the payments to be made to the Cyprus and UK companies as reimbursements of the expenses of the Ukrainian company.
Here is what the “White Paper on Black Money” says about a company and its modus operandi...
Box 4.2 Evidence Found during Search Operations
Supplemented by Information Received from Abroad
A search and seizure operation was conducted on the Indian company G Ltd. In the course of the operation, evidence was collected that indicated the use of international entities for tax evasion. G Ltd was a private limited company with Mr X being its managing director and major decision maker. G Ltd was engaged in the pharmaceuticals business with exports to the Ukraine, Cyprus, and Russia. G Ltd claimed bogus marketing expenses through dummy companies in the Ukraine, Cyprus, and the UK. It claimed the payments to be made to the Cyprus and UK companies as reimbursements of the expenses of the Ukraine company. These funds were diverted to the personal accounts of Mr X who accumulated wealth in foreign countries. In the course of search and seizure operation, the marketing/business promotion expenses were found to be unusually high at 50 per cent of the turnover. The Cyprus and Ukraine-based companies had previously been owned by Mr X. The seals and stamps of these companies were found on the premises of G Ltd. Some of the employees of G Ltd were found to be closely linked with the Ukraine and Cyprus companies. Details of huge investments in the name of Mr X and his family members were found on the premises. Enquiries were made from the UK, Germany, Switzerland, Cyprus, and the Ukraine for the following:
• The ownership structure of these companies
Enquiries into the whereabouts of the Ukraine companies revealed the following facts:
Source: “White Paper on Black Money” (http://finmin.nic.in/reports/WhitePaper_BackMoney2012.pdf
Although the White Paper does not name the company involved in this huge tax evasion, similar modus operandi is mentioned by the high court in its judgement about Genom Biotech Pvt Ltd, and its chief Binod Kumar.
Acting on a tip-off, the I-T department, on 14th-15th May 2008 searched the offices and residents of Genom Biotech, its CMD Binod Kumar, and its directors CMP Singh and Amit Kumar and found incriminating documents.
On 24 July 2008 the deputy director of I-T (investigation) issued a notice under section 153A of the Act calling upon the assessee (Genom, its CMD and directors) to file return of income for the past six years. On the same day, the Assistant Commissioner of I-T, Mumbai passed an order under Section 281B(1) of the Act for provisionally attaching the immovable properties of the assessee and also shares of various companies held in demat account by Binod Kumar.
The assessee, then filed a petition in the Bombay High Court. In the petition, Binod Kumar claimed that the investments by him and his family members in India are made from funds transferred from his foreign income brought in the country through proper banking channel. He also said since he is a non-resident Indian (NRI), the income earned by him outside India is not taxable in the country and initiating search and seizure action with a view to tax the amount brought to India as undisclosed income does not arise at all.
The high court said it did not found any merit in this contention. “...the information received in the present case was that during the period from FY 2001-02 to 2007-08 the petitioner No.1 (Genom Biotech) had evaded tax by claiming deduction of business expenditure amounting to Rs170 crore on the ground that the said amounts have been paid to Cyprus/UK based companies towards marketing and advertisement expenses, but in fact the said amount has been credited by the said Cyprus & UK based companies in the private bank account of petitioner No.2 (Binod Kumar) in Cyprus,” the court said.
Genom Biotech used Biogenetica Ltd, Nicocardia Pharma Ltd and Selesta Holdings Co Ltd (all Cyprus based companies having same address) and UK-based Zyus Corp Ltd for claiming tax refunds.
However, during investigations it was found that the payments made by Genom Biotech towards advertisement and marketing expenses never reached their logical destination i.e. advertising agencies in Ukraine.
During the search, the I-T department also recovered incomplete and or unsigned invoices of the foreign companies along with their seals or stamps. “These incriminating documents prima facie establish that large scale tax fraud has been committed,” the court observed.
The I-T department conducted enquiries in foreign countries through tax authorities to independently ascertain the claim on marketing expenditure by Genom Biotech. Confidential investigation was conducted through tax authorities in Ukraine to ascertain transactions between advertising agencies in that country, supposed to have entrusted with the advertisement assignments by Cyprus and UK based companies on behalf of Genom Biotech.
The outcome of the investigation in Ukraine revealed that there was no commercial transaction between these companies for the investigation period. These advertising agencies did not issue any invoice to and they did not receive any funds from these Cyprus-based or UK-based companies.
Enquiries also revealed flow of funds from Cyprus and UK based companies into personal account of Binod Kumar. The bogus advertisement expenses and marketing expenses were disallowed by the I-T department. Similarly, the high court also dismissed Genom Biotech and Binod Kumar’s petition, against the I-T department.
It said, “…the argument that the assessee ought to have been permitted to shift the security from one banker to another banker so as to avail higher facilities cannot be accepted, because, the petitioner No.2 who appears to be the brain behind the massive tax evasion is not co-operating with the department in unfolding the truth. As a result of non co-operation the investigation is hampered. Consequently, there is delay in determining the demand."
Since then the I-T department raised demands of Rs100 crore each against Genom Biotech and Binod Kumar. After taking several twists and turns the case is now before the Commissioner of Income Tax (Appeals) (CIT-A).
More about this in the next part...
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