IT Department's Rs 138 Crore Tax Demand From Redington

The Income Tax Department made a tax demand of Rs 138 crore from leading technology supply chain solutions provider Redington. This demand is based on ‘imputed profits’ in the transaction that Redington undertook in 2008-09.

Redington’s Middle East and Africa business was conducted through its wholly owned subsidiary Redington Gulf FZE, Dubai (RGF). It had transferred 100% shareholding in RGF without consideration to a wholly owned subsidiary, Redington International (Holdings) Limited (RIHL) that was formed for this purpose.

This transfer was undertaken to attract investment from private equity investor, M/s Investcorp Gulf Opportunity Fund Company 1 B.S.C (Investcorp) which bought a 26% stake in Redington International for USD 65 million and sold it last year to Redington India for USD 114.8 million.

The filing by Redington (India) on BSE said, ‘Based on the directive of the Transfer Pricing Officer, the Assessing Officer (AO) is now proposing to bring to taxation the imputed profits on transfer of shares to RIHL leading to a potential demand of Rs 138 crore, excluding interest.’

Redington said it has the opportunity to approach the Dispute Resolution Panel against the proposed move. A directive to the AO to pass an order would be moved after the authority hears the representation of the company.

Although this is likely to take time and the judgement likely to vary from the current demand, the impact of the tax demand is likely to be significant for Redington. On a consolidated basis, revenues of Redington reached Rs 21193 crore in FY12.

However, the company operates on a wafer thin net profit margin of 1.38%. This miniscule margin of Redington led to profits of a mere Rs 292.74 crore in FY12. Its reserves and surplus amount to Rs 829.26 crore. Considering these figures, Rs 138 crore makes up for a pretty sizeable chunk. But since there is time for a final judgement, there will be no short-term implication on the performance of Redington.