The taxman has slapped Rs 138 crore notice on Redington India for violating transfer pricing norms. The case dates back to 2009 transaction involving Redington India, Redington Gulf FZE (RGF) and Investcorp.
Until 2009, RGF, Dubai was a 100 percent subsidiary of Redington (India). When private equity investor Investcorp Gulf opportunity fund expressed interest in buying a stake in RGF in FY09, Redington India created a fully-owned subsidiary called Redington International Holdings (RIHL), Cayman Island. It had a 100 percent shareholding in RGF. This facilitated Investcorp to buy a 27 percent stake in RIHL.
Although the company says this transaction was disclosed fully in FY09, the I-T department sought taxes for the imputed profits on transfer of Redington Gulf FZE to RHIL.
Discussing the issue, Raj Shankar, deputy MD of Redington India said the transaction was done to attract a private equity investor who could take equity capital stake in Redington Gulf. The company has taken expert advice and will take logical steps like filing a Detailed Project Report and await judgment.
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Below is the verbatim transcript of his interview to CNBC-TV18
Q: Can you explain why the Income Tax Department is charging you Rs 138 crore. Is it for Investcorp buying the subsidiary at USD 65 million and selling it back to you at Rs 114 million? What exactly is this Rs 138 crore charge for?
A: It is important for you to know that until 2008, Redington Gulf, which is the Middle East and Africa company was a 100 percent subsidiary of Redington India. Redington Gulf, which was a USD 35 million company in 2001, grew to about a billion by 2008. The initial equity capital in the company was USD 272,000. At a time when the company was growing at a breakneck speed and all of which organically, the company also had aspirations to tap into certain markets that is South Africa and Turkey in particular.
The company felt at that point in time that it was good to attract a private equity investor who could take equity capital stake in Redington Gulf. Redington Gulf being a free zone establishment at the Jebel Ali Free Zone authority could have only one shareholder, which in this case was Redington India.
So, in order to attract the investment from Investcorp, a vehicle was setup called Redington International Mauritius Limited. Then shares of Redington India in Redington Gulf was transferred to RIML. This was done without consideration. The Income Tax authorities have taken a view that it cannot be for no consideration and hence there is a tax notification.
Q: What is the next step now? When are you going to speak with the IT Department? How soon before this entire case is resolved?
A: We had prior to this transaction consulted with two of the big four audit firms. We had also taken the advice of a very eminent tax lawyer and basis that consultation we had preceded with a transaction. Not withstanding that we had also communicated to the entire relevant statutory bodies about this transaction.
So, the next logical step for us is to look at various options. One, we have a detailed project report (DPR), which could be one logical step that we could take. This in-turn would typically have about nine months by which they need to give their judgment. If for whatever reason the judgment is not in our favour we then of course can appeal to the Income Tax Appellate Tribunal (ITAT) and take it forward to the high court and supreme court.
Q: There is no problem whatsoever with Investcorp buying Redington International for USD 65 million and then selling it back to you for USD 114 million. That transaction is not question at all?
A: Absolutely. This is basically a situation where it is a pure restructuring of the corporation from Redington India owning 100 percent of Redington Gulf. The shares were transferred to Redington International, which by expert opinion is permissible and not exempted from the income tax.
Q: But you think the overhang -- if you go the dispute resolution panel and then to the ITAT could be a year long process?
A: Typically the first step, which is the DRP, would take about nine months. They have maximum nine months to give the judgment and post which it could move to ITAT and thereon.
Q: Have you paid any kind of a deposit, have you already shown this tax liability on the profit and loss (P&L). Just in the event that you win the case will there be a reversal, will there be income accruing in your P&L?
A: This communication was received on the April 1, but dated March 31. At this point in time it is not an order, so there is no compelling need to be able to make any provision at this stage. We have a few options and we would therefore look at and evaluate some of those options.
We basically believe that given the expert advice, we are perfectly in good shape to be able to handle this.
Q: How your revenue might do this year. You had a 20 percent profit growth when you last reported numbers. How is business, should we expect that 20 percent will be maintained for the last quarter and for FY14?
A: It’s a very good year so far particularly Q3 was good and we think Q4 will continue the momentum. H1 was rather difficult, but I also want to impress upon you that a company got listed in February 2007.
In the 24 quarters since the company was listed, I am very proud to share with you that we had registered a topline growth, every single of those 24 quarters and also a bottomline growth. We hope that in Q4, which is January-February-March, we should be able to repeat that.