Bengaluru, Karnataka: Indian authorities have accused SABMiller, the erstwhile second-largest beer-maker in the world, of tax evasion since 2011. It is alleged that the beverage giant avoided paying up millions of dollars by renaming royalty services as a management services.

The New Delhi-based Authority of Advance Rulings (AAR), an adjudicatory body which handles the income tax liability cases of non-residents in India, has said in a June 2018 order that the services provided by Netherlands-based SABMiller Management (IN) BV to its Indian sister concerns qualify as technical know-how and hence, the amount received by the company for rendering these services is taxable under law.

The unpublished ruling of the tax authority upheld the report of the Indian income tax department which said SABMiller had been evading tax on royalty payments for the last seven years.

Earlier in 2010, a case of tax evasion had been made against the SABMiller Group when ActionAid in its report accused the beverage giant of evading taxes in India and African countries. The rights organisation estimated that SABMiller companies in the two nations had deprived these governments of over $12.38 million in tax revenue. However, in 2015, the Competition Appeal Court in Africa dismissed the case against SABMiller, while upholding the decision of the sister tribunal that stated there wasn’t enough evidence to prove the company was breaking the law.

SABMiller is in the business of brewing and distribution across more than 70 countries. It produces and markets brands like Pilsner, Miller, Peroni, Foster, Haywards and Nasto Azzuro. In 2016, the company was acquired by Anheuser-Busch InBev (AB InBev) for over $100 billion to become the largest beer-maker in the world.

The ‘diversion’

In 2008, SABMiller Management entered into a Technology Transfer Agreement (TTA) with its two Indian units, SKOL Breweries and SABMiller Breweries Pvt Ltd, which manufactured SABMiller brand beers. Under the agreement, the Netherland based company was paying tax on the royalty it earned from its Indian units.

In April 2010, however, the company replaced the TTA with a Group Services Agreement (GSA), and since then declared zero income from royalty.

SABMiller has claimed that under the GSA, it was only providing “managerial” services to enable the Indian companies to meet global standards in the absence of facilities for research and development in the brewery sector, which is not classified as royalty. It said so in its response to the allegations of tax evasion by Bangalore office of Income Tax department.

But a source in the Indian income tax department privy to the case said “the rewording is nothing but a transaction designed prima facie for the avoidance of income tax”. While the computation of total tax liability since 2011 is pending, the source estimated it may run into millions of dollars.

SABMiller also told AAR that while under the TTA it provided technical assistance in the form of processes, methods, manuals and technical knowledge related to brewing, under the GSA it was providing financial consulting, improved personal strategy, marketing, corporate affairs, business advisory services, trade secrets and technical consulting.

The Indian tax authorities contested the claims and submitted a clause-by-clause analysis of the two agreements to the AAR. The same technical services that were made available under the TTA were covered under the GSA as well, reported the tax authorities undertaking the investigation, which was acknowledged by the AAR.

The only difference between the two agreements is that the services have been broken down under different categories while being worded differently. "Analysis of information like presentations, email exchanges and other documents, provided by SABMiller shows there isn’t any difference between the two agreements,” said the tax department source.

SABMiller has not responded to queries sent by Nikkei despite reminders.

'Profit element not relevant'

Eric Mehta, a Partner with Price Waterhouse & Co LLP Bangalore chartered accountant, said group companies are often structured such that a centralised group of executives across locations provides support across various verticals from time to time. This could be anything from finance to supply chain, quality control, human resources, research strategies, etc. “Each company has its own way of functioning and sometimes they restructure things without nearly changing anything,” he said.

Narendra Jain, a Bangalore based chartered accountant and expert in International Taxation, pointed out that SABMiller re-characterised the service to move it from the ambit of royalty. “When declaring business income, the non-resident will be taxed only if they are a permanent establishment in India or have a place of business in India,” said Jain. "What the company is trying to do is to establish that this is not royalty, and also that the income is not accruing in India".

“They (SABMiller) have stated a cost-to-cost allocation situation as well, where they are saying they haven’t made any profits so why should they pay taxes. This, however, is not applicable on royalty as it is assessed on a gross basis. The profit element of a non-resident is not relevant here,” Jain said.

The AAR in its order questioned how “world class beer could be manufactured and plant machinery upgraded and maintained by mere managerial/administrative instructions” - as the company suggests.

Since the services provided by the company under the GSA were exclusive and special in nature, they qualify as technical service, the AAR has inferred. It has further suggested that in the face of growing competition where the company needed to protect and expand its brand, it is unlikely that technical services would not be disseminated.

The AAR has also stated that if the benefits of the services provided by a foreign company are reaped in their own country, then it is taxable in the country of the company’s origin. In this case, since the benefits of the services provided by SABMiller are got in India, it would be taxable in India.

Jain said such a situation is applicable to all foreign companies but some may want to plan their affairs in a way that they don’t have to pay taxes, or minimise the tax payable in the source country. “When such a judgment comes, it is a warning which emphasises that rewording the agreement won’t work,” he added.

The ruling of the AAR is binding on foreign companies unless they decide to move the high court with a writ petition in case of change in law or facts or if the applicant has a case to prove that the ruling has been influenced by fraud or misinterpretation.

If there has been a change in services at the company’s end, SABMiller will have to prove that in the HC. “If they are able to distinguish between the two agreements, the verdict will be different,” said Jain.

Google, in a similar case of tax avoidance in India involving royalty payments, had to give in after a legal battle that lasted six years. The company was asked to cough up about $225 million.