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India accuses Cadbury of using unfinished factory to avoid tax

People walk on a pathway in front of the Cadbury India headquarters in Mumbai March 6, 2013. REUTERS/Danish Siddiqui
People walk on a pathway in front of the Cadbury India headquarters in Mumbai March 6, 2013. REUTERS/Danish Siddiqui

NEW DELHI/MUMBAI (Reuters) - Indian tax authorities have accused Cadbury Plc of misleading them about production from a new factory to avoid about $46 million in taxes, a government official said, adding to the chocolate maker's tax woes in the country.

The case comes as India is aggressively pursuing tax claims against multinationals as it seeks to rein in its budget deficit, with Royal Dutch Shell , Vodafone Plc and LG Electronics Inc <066570.KS> among numerous firms involved in disputes.

Cadbury set up a factory in 2005 in the northern Indian state of Himachal Pradesh to take advantage of a 10-year "tax holiday" scheme for companies that started production by March 31, 2010, said a senior official at the tax department.

The company, now part of U.S. snacks firm Mondelez International Inc , in 2009 told authorities it had set up another plant next to the existing one that should be also be exempted from tax until 2019, said the official at the Directorate General of Central Excise Intelligence.

However, the second plant was not operational as of March 31, 2010, when the tax holiday scheme ended, said the official, who declined to be named as he was not authorized to speak to the media. It begin commercial production a couple of months later.

A report on the Wall Street Journal quoted a former Cadbury executive as saying an expansion of the existing factory had been misrepresented as the construction of a second plant for the tax exemption. The tax official did not comment on the Journal's report.

Cadbury did not comment on the detail of the allegations, but said it was co-operating with the authorities.

"We are in the process of reviewing the contents of the show-cause notice from the Excise Department and will respond to it in consultation with our legal advisors," a Cadbury statement said.

TAX DEMAND NOTICES

The authorities have now asked Cadbury why it should not pay 2.5 billion rupees ($46 million) in factory-gate taxes for the second plant for the period between May 2010 and January 2013.

The directorate official said that tax demand notices were sent to Cadbury and its executives on February 28 and the company has been give a month's time to respond.

If the tax directorate was able to establish that Cadbury's new plant became operational after the tax holiday scheme ended, the company would have to pay taxes, tax consultants said. The company is, however expected to challenge the notice, they said.

"Setting up of a factory and commencement of production leave a trail which is undisputable," said the tax practice head at a consultancy in New Delhi, declining to be named as he was not authorized to comment on company disputes.

"My impression is that the directorate's findings are based on specific facts."

In a separate case, the income tax department has accused Cadbury's local unit of overpaying its parent company for brand royalty and service fees, thereby lowering its profit in India and resulting in a lower tax bill.

The company has challenged the ruling for 2007-08 and the local income tax tribunal has granted a stay on the tax demand upon payment of less than 10 percent of the amount.

Cases involving the internal transfer of goods, services and assets -- known as transfer pricing -- have become a hot area of international tax law as revenue authorities in many countries have challenged companies efforts to minimize tax liabilities.

Cadbury was acquired by Kraft Foods Inc in 2010 in a $19 billion deal. Kraft then spun off its North American grocery business as Kraft Foods Group .

Mondelez is the name of what remains of Kraft Foods Inc after the spin-off. Its brands include Oreo cookies and Trident gum.

($1 = 54.8450 Indian rupees)

(Reporting by Rajesh Kumar Singh and Nandita Bose; additional reporting by Sumeet Chatterjee in MUMBAI and A. Ananthalakshmi in BANGALORE; Editing by Alex Richardson)

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