While reading the 1Q'11(June 2010 quarter) conference call transcript of Ganesh Polytex(India's largest PET bottle recycler), I noticed an interesting explanation of how their 1Q'11 tax payments had gone down. The company has 2 plants in Kanpur & Uttaranchal, the latter being exempt from income tax under 80IB of the Income Tax Act 1961(being located in a low industry state). Now, the company used to allocate expenses of the Kanpur plant to the Uttaranchal one only at the year end. So the interim profits of Kanpur used to be low. Now, in the interest of investor transparency, the company decided to allocate the expenses more often. So the Kanpur plant profits went up and the Uttaranchal plant profits decreased-thus leading to greater interim tax outflow. By year end, the profits would have been equalized between the two but the more frequent allocation pushes up the present value of tax payments to the Govt
Takeaway:- While the Income Tax Officer has powers to reassess the income under 80IB if he feels that cost allocation is unfair, no court will order the company to apportion costs more often than annually. So this seems a strategy to defer tax payments-which Ganesh Polytex has not used.