Mumbai: The income-tax (I-T) department claims that the Indian arm of Juniper Networks Inc. evaded tax by inflating the value of hardware it imported from its parent and seeking depreciation on this higher amount.
It also claims that the Indian arm sought the advice of accounting and law firms in India to figure out ways of repatriating the difference between the actual value and the inflated value of the hardware to its parent, and that it eventually decided to do so through a subsidiary of Juniper Networks based in the Cayman Islands.
Juniper as well as its audit firm and advisers deny the I-T department’s claims.
The six-month-long investigation by the I-T department claims that Juniper Networks India Ltd, the local arm of Juniper Networks Inc., inflated the value of hardware it imported from the latter, by at least Rs560 crore, over five years from 2004-05. US-based Juniper makes equipment for directing Internet traffic.
The I-T department alleges that by inflating the value of its purchases, Juniper claimed excess depreciation. The investigation report prepared by the tax agency says Juniper Networks India claimed excess depreciation of at least Rs250 crore for five years.
Depreciation on capital goods is treated as an expense and it lowers profits in a company’s income statement.
According to two officials in the I-T department who are aware of the investigation and do not want to be identified, the report is now with the assessment wing of the department, which will study it and then issue a so-called demand notice to the company. Interestingly, Juniper Networks India is located within a software park of Software Technology Parks of India (STPI) and because of this is exempt from tax on exports. Under the Income-tax Act, units set up in a park run by STPI can avail 100% deduction for 10 years on their profits from exports.
Apart from its revenue from software, the Indian arm also sells and markets products of its parent. This business accounts for around 5% of its revenue. Profits on this are not exempt from tax.
Last July, soon after the investigation began, the I-T department searched the offices of Juniper Networks India; at the time, Juniper admitted that it had evaded tax to the tune of around Rs175 crore.
Tracking the money
The I-T department claims that since the import of equipment was a transaction between a parent and its Indian arm, the money wasn’t paid immediately. It further adds that at the time of the settlement, the Indian company couldn’t pay Juniper Networks Inc. the entire amount. The US firm, the I-T department claims, had registered the transaction at a lower amount than that registered by the Indian firm. Juniper Networks India carried forward this accumulated payable amount every year in its balance sheet for five years beginning 2004-05. To resolve the issue, the parent, according to the I-T department, appointed law firm ALMT Legal.
The I-T department also alleges that Juniper Networks was planning to transfer the money to another Juniper firm in the Cayman Islands.
Some of the alleged discrepancies unearthed, the I-T department claims, were ignored by the company’s auditors. The books of Juniper Networks India are audited by SR Batliboi and Co. Ernst and Young (E&Y) is the auditor of Juniper Networks Inc. SR Batliboi and Co. is one of the firms through which E&Y operates in India.
In an email response to Mint, a spokeswoman for E&Y said: “We remain confident of the quality of our work and have followed the applicable professional standards.” Sridhar Sarathy, MD of Juniper Networks India, said: “Juniper does not comment on pending tax audits or inquiries. However, Juniper can confirm that we have had discussions with the income-tax department in India. Juniper has consulted with several experts and the special counsel, and believes it has paid all applicable taxes.” Kim Markle, spokeswoman of Juniper Networks Inc., declined comment “on pending or ongoing investigations”.
An email trail
The I-T department claims to have established a trail of email exchanges between Juniper Networks India, its auditor SR Batliboi, legal advisers ALMT Legal and AZB and Partners, tax consultant to the firm PricewaterhouseCoopers Pvt. Ltd (PwC) and Juniper Networks Inc. These emails indicate that Juniper Networks India was planning to send about Rs560 crore to Juniper Networks (Cayman) Ltd, a holding company for subsidiaries of Juniper Networks Inc.
In 2009, the I-T department spoke to officials from SR Batliboi, ALMT Legal, AZB and Partners and PwC for investigation. The I-T department also claims that during the investigation an official of Juniper Networks India stated that there was a plan to assign the accumulated liability to an another subsidiary of Juniper Networks Inc., USA, in the Cayman Islands and that ALMT Legal had drafted a deed of assignment for this.
Aliff Fazelbhoy, legal partner of ALMT Legal, said in an email that his firm was “in no way involved in advising on the alleged practice of inflating purchase bills nor of the alleged diverting funds to another group company based in Cayman or anywhere else without duly complying with the applicable laws and regulations.”
“We were only consulted on a very limited issue. ALMT states it would not be appropriate for them to offer any comments on the matter,” he added. Shares of Juniper Networks India are directly held by Juniper Networks International Llc, which, in turn, is wholly owned by Juniper Networks (Cayman) Ltd.
Juniper Networks (Cayman) Ltd is ultimately owned by Juniper Networks Inc.
Like ALMT, AZB and PwC, too, said their involvement with Juniper was above board.
“We have not advised Juniper on tax or investment related advice (Juniper has other legal advisers as well). We have not deleted any emails. We were not aware of any discrepancies or matters related to the business of the company. We have informed the income-tax department accordingly. Our involvement was mainly in relation to limited corporate secretarial matters,” said Zia Mody, senior partner of AZB and Partners.
A PwC spokeswoman said: “We have not advised Juniper to inflate any purchase bill or to evade taxes. We were neither consulted nor were aware of any alleged diversion of funds by Juniper to any company in Cayman Islands or any other country when such incidents allegedly took place. We have not exchanged mails in relation to the alleged activities, with the auditors or lawyers of the company and are not a party to any alleged deletion of emails.
“We assisted the company in the preparation of their income-tax returns for various years. These were based on data provided by the company and generally certified by the auditors including depreciation on assets purchased by the company,” she added.