Rs 1,450 crore Tax Evasion notice slammed on HP

The Bengaluru division of Directorate of Revenue Intelligence (DRI) has
slammed a Rs 1,450 crore tax evasion notice on HP India on charges of improper
disclosure of its imported products. Backed by the charge of undervaluing its
components and raising duplicate invoices, primarily one for customers and
another for its internal official accounts, DRI has issued a show-cause notice
to HP India Sales (HPISPL), the Indian division of the California based HP in
order to possibly seek a clarification on its entire import records since FY
2005-06.

The Allegations

DRI has alleged that HPISPL had undervalued its imported products, which
include computers, laptops, notebooks, desktops, spares and other peripherals
supplied by its overseas HP entities, possibly in Singapore and the US.
Furthermore, the government agency has declared that HPISPL was entitled to a
discount ranging between 44% and 83% on its imports. While some part of this
discount was being transferred to their sub-dealers in the channel space as a
measure to boost the competitive environment in the channel and end-user space,
the rest of the discount was being retained by HPISPL itself. The company has
been allegedly hiding these details from customs authorities. HPISPL being a
part of the Accredited Client Program (ACP) has access to an extended green
channel facility in customs for a faster clearance of imported goods without the
routine customs checks and scrutiny.

Sunil Dutt, president, PSG division, HPISPL says, The DRI have stated its
position and we are contesting it. We have always abided by the law and have
conducted transparent business all this while. The company has pre-deposited Rs
79.25 crore with the government. However, HP in an official statement claims
that it has cooperated fully with the Directorate of Revenue Intelligence in its
investigation.

In September-October, 2008, a similar case of excise duty evasion was slammed
on the company. Most of HPs partners in the east and south are unwilling to
comment. A similar incident had occurred before when the price quoted on HP
boxes were much lower than the actual MRP of the product. There must be
something wrong with HPs customs declaration, comments a leading channel
partner of HP based in Kolkata.

HP partners across the east confirm that there are back-end issues along with
the degraded service stature of the company. One of the HP partners in the east
says, It is true that HP has been retaining a major chunk of the discount on
the imports. Besides, there are rumors that HPISPL brought spare parts in India
for the sake of after-sales services and repairs under their warranty scheme,
but routed them to full-fledged sales later.

Apart from these charges, the HP partner also says, HP has been charging
atrocious amounts for repairs from its customers for a long time. Since these
parts are exclusive to HP, the customer also has no other option but to abide by
the companys dictum.

Maintaining Loyalty

Although some partners in the eastern upcountry have started to question the
companys integrity and policy, especially as HP has changed its distribution to
a RD model based on cash flow trading rather than the traditional credit based
policy, some partners maintain their loyalty with the company.

Enforcing the same, Pradeep Jhawar of Kolkata based Bard Roy Infotech says,
I stand by HP in this situation. I think the channel business will not be
affected at all. Besides, I do not see any reason to worry about any projected
dip in HP sales. HP partners in the northern region have shared a similar point
of view. Speaking about the ongoing issue, Daljit Singh of Compro Systems says,
HP will challenge the DRI in court and this will not have much of an impact on
the market. Price behavior is entirely dependent on the market dynamics and I do
not see any problems in the future. Somesh Narang, CEO, Elcom Trading says, I
do not see this impacting HP in the short term. HP will fight wholeheartedly in
the court of law. With the recent change in HPs channel strategy, there are no
sales pressures in the market. There may be a price impact only if HP loses the
case.

Also, HPs partners in Mumbai are siding with the company. I do not think a
company of HPs stature will resort to such an unethical method to save money.
As far as I know, HP is an ethical company and they have been around in India
for about twenty years now. I think there is just some misunderstanding and they
will emerge out of this stronger, says Bimal Kumar of Navi Mumbai based Geonet
India. Sudhir Budhay of Nagpur based Business Algorithms says, According to me,
HP is an ethical company. It is possible that this could have happened through
some confusion or misunderstanding; but I am sure they will deal with this
accordingly.

However, Balkrishnan Prabhudesai of Goa based Amey Computers says that the
government is at fault instead of HP. Speaking about the show-cause notice
issued to HPISPL, he says, Even if it is true, I would say that why should only
HP be blamed? It is the government that is at fault. They are aware that most
companies that do import goods undervalue the price in order to save or evade
tax or customs duty. This is applicable to many companies and not just HP, if
they are doing it. So the onus lies with the government to clean up its act.
Even when I was the President of the association here, we addressed this to the
Finance Ministry, but they have not been responsive to our concerns yet.

Mixed Reactions

Partners in Chennai received the news with mixed reactions. A HP partner in
Chennai says, Already we are facing lots of problems with HP in terms of
service tax on the back-end and VAT on cartridges. The evasion can be calculated
only for five years, but what about the previous five where it enjoyed monopoly
in the marketshare. On a similar note, S Prakash, Proprietor, Vashini Systems,
Salem, who is also the President of Confed-ITA says, The government has to be
more careful in allotting the green access to MNCs. Most of us also feel that
they should be made more accountable like the Indian companies.

A Hyderabad based partner on the condition of anonymity says, HP is too big
a company for anyone to tarnish. We are doing business with them since last
twenty years. Even if the government brings HPs act out in the open, public
memory is very short and this will not hinder their business in the country. The
dealers are a very small part of this big ocean.

With a diverse set of responses pouring in from HP partners, its trade
partners in India are unwilling to comment. Besides, HP is also facing a bribery
probe in the Europe over a 2003 contract. Concluding HPs stance over the
ongoing confusion with DRI, Dutt says, We will revert appropriately to the
position stated and deal with this through the legal route. As far as where this
supposed allegation came from is concerned, I do not want to speculate about it
as of now. Later, we will respond accordingly.

Avishek Rakshit/DQ Week

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