France's Pernod puts India investments on hold, cites protracted tax fight

French spirits group Pernod Ricard has put new Indian investments on hold due to long-running tax disputes with authorities on valuing liquor imports, according to two sources with direct knowledge and company letters seen by Reuters.

Its shares fell 1.8% on the news, underperforming peers.

The world's second-biggest spirits group said its legal wrangles have progressively worsened since they first started nearly 30 years ago, making it tough to do business in the country and raising the prospect of a major financial hit.

The maker of Chivas Regal, Glenlivet Scotch whisky and Absolut vodka is lobbying Indian authorities, including Prime Minister Narendra Modi's office, to resolve the matter.

"This ever-lasting litigation has been a big strain on our ease of doing business and has inhibited fresh investment by our group headquartered in Paris (France) for expansion of business in India," Pernod wrote in a Nov. 24 letter to Modi's office.

"These disputes initially arose in 1994 in import valuation by the custom authority, have compounded year after year and is still ongoing."

Pernod's stance casts a shadow on future growth of the company in a region it says is among its "key strategic markets". It expects India and China, the world's two most populous nations, to drive most of the alcoholic industry's growth in the next decade.

India's $20 billion alcohol market is set to grow by 7% annually in the 2021-25 period, with whisky and spirits among favourites, IWSR Drinks Market Analysis says. Pernod accounts for 17% of the country's alcohol market by volume, while Diageo commands a 29% share.

In its letters, Pernod said there is disagreement with officials over how the company values its imported liquor bottles and raw material and pays tax on them. The first source said Indian authorities have often alleged Pernod suppresses costs of imports, which attract a 150% federal import tax.

Attaching the letter to Modi, Pernod wrote to India's Central Board of Indirect Taxes and Customs (CBIC) on May 27 saying that the lack of certainty in import valuation was hitting its current business and had a "severe impact" on expansion plans.

The CBIC and Modi's office did not respond to requests for comment on the letters, which have not been reported previously.

Pernod, in a statement to Reuters, said it has been in "continual dialogue" with Indian authorities as it looks at finding "a swift resolution to this long-standing matter".

The company is collating all relevant information to aid in the correct reassessment by authorities and aims to preserve Pernod's rights while "avoiding any business disruption", the statement added.

"FINANCIAL BURDEN" RISK

Foreign companies in other industries too have had concerns about the tough regulatory regime in India, where Modi is seen promoting domestic businesses. Global automakers, including Tesla Inc, for example, have for years complained about high taxes on imported cars and electric vehicles.

In its November letter, Pernod shared its upcoming India business proposals that included a plan to set up new production lines to boost capacity by more than 40% a year by 2025, and increasing export earnings by a third to $126 million in the next five years.

The company's plans were going very slow in light of the legal disputes, and "everything is on hold", the first source said about the company's new investment plans.

Its written pleas to the Indian officials urge a settlement of the disputes in a reasonable manner, asking for a "sympathetic consideration".

The letters state two issues: disputes at various tribunals over valuation of concentrated alcohol Pernod brings in to manufacture liquor locally; and tussles related to "bottled-in-origin" products like Chivas that are imported in bottles.

In both type of imports, Pernod's costing methods and payment of taxes thereon has been questioned by authorities, which has often led to consignments being held up at various ports, according to the first source and the May 27 company letter.

In case of importing bottles like Chivas, specifically, authorities are proposing to add advertising and promotion expenses in the import value, and pay tax on that, a methodology Pernod disagrees with, the letters state.

Any increase of taxes to be recovered many years after products had been imported could "expose the company to huge financial burden," Pernod said in its May communication.

(Reporting by Aditya Kalra in New Delhi; Editing by Muralikumar Anantharaman)