Redington’s management indicated that based on the advice from two out of the big four audit firms in India and eminent tax lawyers, it is confident that this tax liability will likely be reversed
As per Redington India’s filing with the BSE, the Indian income tax (I-T) department has proposed to bring to taxation the imputed profits on transfer of Redington Gulf FZE, Dubai shares to Redington International Holdings (RHIL), Cayman Island leading to potential demand of Rs1.38 crore ex interest for year 2008-09.
The company indicated that this transaction was disclosed fully in FY09 to the relevant authorities, including the I-T department and its discussion with tax experts indicates that it has a strong case. Analysing the case, Nomura Equity Research in its Quick Note has included seven cases where shares were transferred to a group entity without consideration out of which in five cases the verdict was in favour of the company.
Redington Gulf shares were transferred to a newly formed entity RIHL to facilitate investment by Investcorp, a private equity investor
Nomura Equity Research states that Redington’s Middle East and Africa business, Redington Gulf FZE (RGF), Dubai was a 100% subsidiary of Redington (India) before FY09. In FY09, private equity investor, Investcorp Gulf opportunity fund (as it is a Middle East-focused fund) wanted to purchase a stake in RGF. As per Jafza law in Dubai which applied to RGF, the entity can only have one shareholder. To facilitate investment by Investcorp, Redington International Holdings (RIHL), Cayman Island was created as a fully owned subsidiary of Redington India, which had a 100% shareholding in RGF. Subsequently, Investcorp bought a 27% stake in RIHL.
Management remains confident on reversal of tax liability
Redington’s management indicated that based on the advice from two out of the big four audit firms in India and eminent tax lawyers, it is confident that this tax liability will likely be reversed. According to management there are precedents where shares were transferred to a group entity without consideration (called ‘gifting’) and the transaction was treated as tax exempt.
Tax liability of Rs138 crore (ex interest); no deposit to be paid now
Going further Nomura states that while there was no consideration paid on transfer of RGF from Redington India to RHIL, the I-T department has made a potential demand of Rs138 crore. This is based on a fair value ascribed by the tax authorities at that point of time to RGF of Rs800 crore (and a cost base of around Rs210 crore). The company has indicated that it does not have to pay any penalty, as both the income tax department and RBI were informed about this transaction and re-organization. However, in case the verdict does go against the company in the dispute resolution panel (DRP), Income Tax Appellate Tribunal (ITAT), high court and eventually Supreme Court, the company will be liable to pay interest as well on the amount of Rs138 crore. The company does not have to deposit anything until this case is with the DRP (which has to decide at the latest by Dec 2013), but may have to pay 50% of the demand amount or bank guarantee if the dispute escalates to ITAT/high court/Supreme Court.
Precedents – favourable and unfavourable rulings
Goodyear Tyre and Rubber Company, 2011: The Delhi High Court dismissed the petition filed by the I-T department against the Authority of Advance tax Ruling (AAR) in the case of Goodyear Tyre and Rubber Company. Goodyear US held a 74% stake in Goodyear India (GIL), which was transferred to Goodyear Orient Company (Pte) Singapore, a 100% subsidiary of Goodyear US. The AAR ruled that no capital gains tax would accrue where shares were transferred 'without consideration' by the holding company in the US to its wholly owned subsidiary in Singapore. As well, transfer pricing provisions will not be applicable in the absence of liability to pay tax.
Deere & Company, 2011: The AAR ruled that gift of shares by the applicant, a US-based company to its group company in Singapore made without any consideration, has to be held as a gift and therefore will not be subject to tax in India.
Nadatur Holdings and Investment, 2012: The Karnataka High Court dismissed the revenue department’s appeal and upheld the genuineness of gift on the basis that there is no bar for gifting of shares to a company. The high court held that the definition of ‘gift’ means transfer by one person to another of an existing property made voluntarily and without consideration and includes deemed transfer or conversion of any property. Since the taxpayer was a separate legal entity, shareholders of the company can gift shares to the company.
DP World, 2012: The Mumbai Tribunal held that there is no restriction under the Transfer of Property Act on gift of shares between companies, if permitted by Articles of Association.
Dana Corporation (2009) and Amiantit International Holding (2010): The AAR held that once the transaction is held to be outside the purview of Indian tax net, the question of applying provisions of transfer pricing and treating the arm’s length price as the transfer price would not arise.
Orient Green Power, 2012: The AAR has held that ‘gift’ of shares between two corporations is a “strange transaction” and would not fall under Section 47(iii) of the Act. Further, it declined to give ruling on taxability of gift of shares of an Indian company by a foreign company, citing lack of material to conclude on the genuineness and validity of the transaction as reason.
Castleton Investment, 2012: The AAR has held that the transfer pricing provisions are applicable to “any income arising from an international transaction” and that the word ‘income’ has a wide connotation. Accordingly, AAR held that application of transfer pricing provisions are mandatory for correct determination of gains accruing from an international transaction irrespective of the fact whether the same is chargeable to tax in India or not. In other words, the AAR held that applicability of transfer pricing provisions (i.e., Section 92 to 92F of the Act) does not depend on the chargeability under the I-T Act.
Redington India remains buyers of India’s largest distributor of IT and electronic products. Nomura concludes with the view that the potential of the Indian market should be seen in the context of a doubling of the middle-class population in the next 10 years (source: Dell), which is likely to mean increasing average disposable income that should drive IT/electronic penetration rates in India, in our view. The company has end-to-end coverage of the distribution value chain (procurement, warehousing, non-banking team. It has a credible history of managing inventory and credit risk, which we consider key to success in the distribution business. Average provisions for inventory and receivables were 0.04% and 0.1% over FY08-FY12 for India and overseas business over the same period, respectively.
Redington India was trading at Rs42.70 on the BSE in noon trade today. The brokerage states that the current P/E valuation at 6.7x FY14F EPS is a 43% discount to its six-year average of 11.7x and is an attractive entry point.
While it does not make much sense to have a free look-up period for products such as NSC, PPF and other deposits schemes supported by the government, the introduction of a free look-up period in case of variable return and high-fee products makes sense
I recently received an email from a New Delhi-based senior citizen aged 78. The email describes how a private sector bank allegedly mis-sold him a fixed maturity plan of DWS Mutual Fund. As per the mail written by the investor he was made to invest in Rs4 lakh in “DWS Hybrid Fixed Term Fund Series 10 Growth”. The investor in his mail writes, “The bank manager, suo moto, had visited my residence and misguided me. I signed the cheque in the name of DWS. I was explained that this means Development of Wealth Scheme, rest of the name as well as other particulars in the form was completed by the bank”. He does not want to remain invested in this scheme as he wants his money back. Though the incidence of mis-selling cannot be established based on the mail alone, this case raises some serious issues which need a solution.
The problem in this case is not that the scheme has lock-in period of five years. The problem is that of liquidity. The KIM of the scheme states, “No redemption/ repurchase of units shall be allowed prior to the maturity of the scheme. Investors wishing to exit may do so through stock exchange mode”. It is very obvious that stock exchanges offer very limited liquidity and market depth and trading is not done frequently in various schemes of mutual funds. While mutual funds do list their schemes on stock exchange, they cannot ensure trading. Liquidity remains elusive in these schemes and investors have no or very limited option of redeeming these units, in spite of a token exit option being given to them.
While establishing cases of mis-selling may not be very easy and I do not have sufficient evidence to establish whether it is a case of mis-selling or not, the incident has definitely made me think. How can investors be protected against mis-selling, especially when an investment product has a lock-in period and an impractical exit route? Even if there is a volume in some mutual fund units, how will a gullible investor take the route of opening a demat account and trading account to sell the otherwise illiquid investment product.
In my opinion, the solution lies in introducing a “free look-up period” in all mutual fund products with a lock-in period. Plans such as the fixed term plans, recently introduced RGESS (Rajiv Gandhi Equity Saving Scheme), have lock-in periods and cannot be directly redeemed with the mutual fund. These investment products earn a huge fee for distributors and hence there is the possibility of mis-selling. Since investors, especially those who can be easily made victims of mis-selling, may find their money locked for considerable period of time, it makes sense to provide some kind of protection mechanism to investors. Considering that this problem may be faced by many investors, there should be at least 15 days’ free look-up period in case of all such investment products.
While it does not make much sense to have a free look-up period for products such as NSC, PPF and other deposits schemes supported by the government, introduction of a free look-up period in the case of variable return and high fee paid products make sense. The modalities for a free look-up period can be worked out by the regulator in consultation with the fund house and AMFI (Association of Mutual Funds in India). Till financial literacy isn’t prevalent, providing legal support to investors to reduce incidences of mis-selling is the need of the hour.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
Efforts need to be taken to protect and preserve foodgrain for the benefit of the large number of poor in our society who are struggling to survive on a single meals a day
Germany is the fourth largest country in the world in terms of nominal gross domestic product (GDP). With a population of about 82 million, it has a per capita income of over $44,100 as per IMF estimates. It is the most developed country in Europe with technological leadership in several capital-intensive industries. Despite all these riches, its people are active in conserving their national resources, as is evidenced by the real life example conveyed by an Indian who visited the country. The following is a first-person account of an interesting incident that took place in Hamburg, Germany. We too need to cultivate such consciousness to preserve our national resources for the good of our people.
Penalty levied for wasting food in Germany
“When I arrived at Hamburg, my colleagues who work in Hamburg arranged a welcome party for me in a restaurant. As we walked into the restaurant, we noticed that a lot of tables were empty. There was a table where a young couple was having their meal. There were only two dishes and two cans of beer on the table. I wondered if such a simple meal could be romantic, and whether the girl will leave this stingy guy.
There were a few old ladies at another table. When a dish is served, the waiter would distribute the food for them and they would finish every bit of the food on their plates. We did not pay much attention to them, as we were looking forward to the dishes we ordered. As we were hungry, our local colleague ordered more food for us.
As the restaurant was quiet, the food came quite fast. Since there were other activities arranged for us, we did not spend much time dining nor did we consume the entire food that we had ordered. When we left, there was still about one third of the unconsumed food left on the table.
When we were about to leave the restaurant, we heard someone calling us. We noticed that the old ladies in the restaurant were talking about us to the restaurant owner. When they spoke to us in English, we understood that they were unhappy about us wasting so much food. We immediately felt that they were really being too busybodies.
‘We have paid for the food that we had ordered, it is none of your business how much food we left behind,’ my colleague told the old ladies.
The old ladies were furious. One of them immediately took her hand phone out and made a call to someone. Within a few minutes, a man in uniform claimed to be an officer from the Social Security Organization arrived. Upon knowing what the dispute was, he issued us a 50 euro fine. We kept quiet. My local colleague took out and gave him a 50 euro note and repeatedly apologized to the officer.
The officer told us in a stern voice, ‘Order what you can consume, the money is yours, but resources belong to the society. There are many others in the world, who are facing shortage of resources. You have no right to waste the nation’s resources.’
Our face turned red. We all agreed with him in our hearts. The mindset of people of this rich country put all of us to shame. We really need to reflect on this. My colleague took copies of the fine ticket and gave a copy to each of us as a souvenir. This will always remind us that we shall never be wasteful.”
What is the moral of the story?
The moral of the story is loud and clear. Though our people rarely waste much food in restaurants, we as a nation waste a lot of food during marriages, festivals and other occasions without caring about the large percentage of our people that go hungry each day. The levels of poverty, hunger and deprivation are so high in our country and little attention is paid to this by the well-to-do citizens and the politicians of our country.
Otherwise, how do you explain the fact that the lack of proper storage facilities is resulting in rotting of foodgrain in our country? As per the media report dated 8 May 2010, the government has acknowledged that our country wastes Rs58,000 crore worth of food items every year due to lack of or poor storage facilities. The condition of the godowns in the country is not good and that is resulting in the rotting of good grain.
The Union minister of state for food and public distribution stated last week that the government’s food subsidy bill for the year is estimated to be Rs1.35 lakh crore and the government will have to procure about 62 million tonnes of good grain to meet the targeted public distribution system. If only the foodgrain wasted in the country due to lack of storage facilities was saved, the burden of subsidy would have come down to that extent and thus saved the tax-payers’ money. But who cares?
Is there no solution to this problem?
The best way is to create awareness about the need to avoid wastage of food at all levels. But that alone will not solve the problem. There is a need to penalise people who are responsible for failure to preserve and protect the precious edible resources of the country as is done in Germany. This could have been easily done through the Food Security Bill that is awaiting the consent of the Parliament. But unfortunately, the Food Security Bill, in its present form, does not provide for any such provisions to penalise wastage of food, nor does it cast any obligation on the government in power to ensure that the people in charge should be held accountable for their failure to protect foodgrain produced in this country.
It is time to take note of the obligation of every citizen of this country to ensure that the food wastage is totally avoided. Efforts must be made to protect and preserve foodgrain for the benefit of a large number of poor in our society who are struggling to survive without even two square meals a day.
(The author is our regular columnist and he writes for Moneylife under the pen-name Gurpur’)