Exclusive-India probing Pernod, Diageo Scotch imports under India-UK trade pact, sources say

By Aditya Kalra

NEW DELHI, Oct 19 (Reuters) - Indian tax officials are investigating whether liquor giants Pernod Ricard and Diageo wrongly classified some bulk Scotch imports, allowing them to pay lower tariffs introduced under the recently agreed India-UK trade pact, five industry sources familiar with the matter said.

Import tariff disputes have long been a sore point for foreign investors in India and embroiled companies like Samsung, LG and Volkswagen. They often involve large back-tax demands raised years after the items were imported, with Indian officials saying they are only enforcing the law.

Last week, tax inspectors made an unexpected visit to Pernod's India headquarters near New Delhi where they questioned company executives about their Scotch imports, three of the people said. 

Diageo's Indian unit, United Spirits, in a stock exchange filing last week said its offices in multiple locations were searched on Friday as part of an "industry-wide exercise" by authorities, without saying what the search related to. The other two people said Diageo is also being investigated for how it classifies some Scotch imports.

Pernod told Reuters in a statement that it is cooperating with the Directorate of Revenue Intelligence and providing all information requested, adding it was committed to addressing any questions from the authorities. Diageo, also in a statement, said it is cooperating with Indian authorities, and has always complied with local laws. In its stock exchange disclosure, it said it had provided all documents and clarifications.

The Indian revenue directorate did not respond to a request for comment. 

Reuters is first to report that tax inspectors visited Pernod's India office, and publish details of the probe, including that it is linked to the UK-India tariff declarations. 

BULK SCOTCH IMPORTS

Diageo and France's Pernod Ricard dominate India’s $65 billion alcohol market. Both companies import bulk Scotch concentrates in containers to mix with other ingredients to make brands like Royal Stag, Blenders Pride and McDowell’s.

Under the trade pact, which took effect on July 15, India agreed to slash import taxes on certain Scotch imports to 75%, from 150%. 

The tax inspectors argued that the duty relief did not apply to bulk concentrates, four of the people said.

"The tax department is concerned that bulk imports are being wrongly classified," one of them said.

ICONIC PRODUCT

The UK accounts for almost 75% of India's imported spirits market, primarily driven by Scotch whisky, Crisil Ratings said this year.

In July, the British government said "iconic UK products" including whiskies and gin would benefit from India's tariff changes. It added that the UK's whisky exports to the country were worth more than £200 million in 2022.

Pernod is already facing antitrust cases in India, its biggest market by volume, and a $314 million back-tax demand for allegedly undervaluing some imports. The company denies wrongdoing. 

Diageo in August agreed to reformulate some of its most popular drinks after the country's food ​safety regulator banned them in some states for adding flavours against regulations.   

During the visit to Pernod's India office on Thursday, tax inspectors reviewed some documents related to bulk Scotch imports, but have not been in contact since, said one of the people. 

(Reporting by Aditya Kalra; Editing by Kirsten Donovan)