Exclusive-India's Scotch probe of Diageo, Pernod undermining India-UK pact benefits, trade group says

By Aditya Kalra

NEW DELHI, Oct 23 (Reuters) - India's move to exclude bulk Scotch imports from a reduced 75% tariff goes against provisions agreed in an India-UK trade deal, a group representing liquor makers Diageo and Pernod Ricard wrote in a letter seen by Reuters.

Whisky tariffs were a sticking point during the years of protracted negotiations leading up to the deal's July 15 implementation, though India ultimately agreed to halve import taxes on certain Scotch imports from 150% to 75% immediately and to 40% over 10 years.

The British government said "iconic UK products" like whiskies would benefit from the pact. Indian investigators, however, have privately told companies the reduced rate does not apply to bulk Scotch concentrates, creating the first significant dispute over the free trade agreement since it took effect.

India's Directorate of Revenue Intelligence searched the offices of Pernod and Diageo and questioned executives this month as part of an investigation into whether they misclassified imported products to benefit from the reduced rate.

In a letter to the commerce minister on Friday, the International Spirits and Wines Association of India (ISWAI) wrote that the classification issue "risks undermining, in practice, an important market-access benefit negotiated and agreed between India and the United Kingdom."

"The preferential tariff treatment negotiated ... could effectively become unavailable for these imports," continued the letter, a copy of which was seen by Reuters.

ISWAI declined to comment on its letter, while India's commerce ministry did not immediately respond.

Pernod, which counts India as its biggest market by volume, declined to comment, and Diageo did not respond to a request for comment. Both told Reuters earlier this week that they were cooperating with Indian authorities carrying out the investigation.

BIG IMPLICATIONS FOR INDIA'S DRINKS SECTOR

Import tariff disputes have long been a sore point for foreign investors in India, who have in the past faced demands for large amounts of back-tax. Such disputes have embroiled the likes of Samsung and Volkswagen.

Pernod is already facing antitrust cases in India and a $314 million back-tax demand from Indian authorities, who accuse it of undervaluing some imports. The company denies wrongdoing.

ISWAI's letter underscores the shockwaves the investigation has sent through India's $65 billion alcohol market. Britain accounts for almost 75% of India's imported spirits, primarily driven by Scotch whisky, according to Crisil Ratings.

Indian government inspectors have told companies that they do not benefit from the reduced 75% tariff on bulk imports of Scotch concentrates, which must be declared under a customs classification that attracts a 150% duty, three people with direct knowledge of the matter told Reuters.

Pernod and Diageo import bulk concentrates, mixing them with other ingredients to produce hugely popular Indian brands like Royal Stag, Blenders Pride and McDowell’s.

The three people said companies including Diageo and Pernod believe concentrates imported from Britain should benefit from the new, lower tariff. And ISWAI said in its letter that the India–UK agreement expressly provides preferential tariff treatment for whisky under the relevant tariff lines.

An urgent clarification could ensure market-access benefits negotiated by India and Britain are realised "while avoiding uncertainty and disruption for legitimate industry participants," the letter said.

A spokesperson for the British government said: "We are working with the Government of India to resolve this issue to ensure UK businesses can export under the tariffs agreed in the trade deal."

(Reporting by Aditya Kalra; Additional reporting by Shivangi Acharya and Alistair Smout; Editing by Joe Bavier)