REPORT OF THE BOARD OF DIRECTORS & MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEARENDED 31ST MARCH 2017
The Directors of your Company have pleasure in presenting before you the Annual Reporttogether with the Audited Statements of Accounts for the year ended 31st March 2017.
|Financial Results || ||Rs Lakhs |
| ||2016-17 ||2015-16 |
|Revenue from Operations ||228239 ||205878 |
|Net Profit after Tax ||16721 ||15311 |
|Profit brought forward from previous year ||12595 ||11758 |
|Balance available for Appropriation ||29316 ||27069 |
|Amount transferred to General Reserve ||835 ||1525 |
|Dividend proposed* ||- ||10809 |
|Corporate Dividend Tax (Net)* ||- ||2140 |
|Surplus in the Statement of Profit and Loss ||28481 ||12595 |
|*(Refer Note 7 in the Notes on Financial Statements) || || |
|KEY RATIOS || || |
|Earnings per Share (Rs) ||108.28 ||99.15 |
|Dividend per Share (Rs) ||75.00 ||70.00 |
Value creation during the decade has been Compounded Annual Growth Rate(CAGR) 11.1% in Earnings Per Share (EPS) and 13.3% in Dividend Per Share (DPS).
The Directors are pleased to recommend a dividend of Rs75 per equity share of Rs10 eachin the paid up equity share capital of the Company for consideration and approval ofMembers at the Annual General Meeting (AGM). It is proposed to carry forward an amount ofRs835 lakhs to General Reserve.
Pursuant to Regulation 43A of the SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015 top five hundred listed entities based on marketcapitalisation are required to formulate a Dividend Distribution Policy.
The Board has approved and adopted a Dividend Distribution Policy and the same isdisclosed on the Company's website at: http://www.vsthyd.com/i/Dividend-Distribution-Policy.pdf.
MATERIAL CHANGES AND COMMITMENTS
Except as disclosed elsewhere in the Report there have been no material changes andcommitments made between the end of the financial year of the Company and the date of thisReport.
The paid up Equity Share Capital as on 31st March 2017 was Rs1544.19 lakhs. TheCompany has neither issued shares with differential rights as to dividend voting orotherwise nor issued shares (including sweat equity shares) to the employees or Directorsof the Company under any Scheme.
No disclosure is required under Section 67(3)(c) of Companies Act 2013 in respect ofvoting rights not exercised directly by the employees of the Company as the provisions ofthe said Section are not applicable.
INDUSTRY STRUCTURE & DEVELOPMENT
The trend of year-on-year tax hike continues with an excise increase of 10% acrosssegments announced in the Union Budget presented in February 2016. Arbitrary increases instate taxes (VAT) witnessed in Assam Rajasthan & Chhattisgarh posed a challenge tolegal players.
Fifth successive year of tax increase led to companies adopting a strategy ofconservative price hikes to ensure minimal decline in volumes. On the other handlegitimate stakeholders continue to be under pressure through the increasing presence ofnon-duty paid cigarettes. Legal cigarettes cost on an average seven times more thannon-duty paid cigarettes.
New pictorial warning covering 85% on both front & back panels replaced 40% warningon front panel in April 2016. The government has made it mandatory to change the graphicevery 12 months. Other regulations including sale of loose cigarettes & sellingrestrictions continue to operate in some large states such as Uttar Pradesh Tamil Nadu& Kerala.
Regulatory pressures including taxation are likely to continue as policies in India getincreasingly aligned with FCTC (Framework Convention on Tobacco Control) directives.
Your Company largely operates in the value segment. Recurrent tax hikes & growth ofnon-duty paid cigarettes affect your Company disproportionately. Concerted efforts areunderway to premiumise the portfolio & build price resilience.
Your Company's strategy of portfolio expansion through relevant differentiation hasculminated in establishing higher priced trademarks such as Editions King size & Total69mm in the last two years. Your Company's existing trademarks such as Special & RedCharms have also delivered a strong performance in key markets.
Your Company is focused on developing a robust brand portfolio appealing to varyingconsumer preferences across socio economic profiles. It is also your Company's ongoingendeavor to increase geographic presence through necessary investments in distributioninfrastructure.
Cigarette volumes of your Company during 2016-17 stood at 7283 mns compared to 7332 mnsin 2015-16. Your Company has largely retained its volume base in spite of another year ofdouble digit excise hike.
Your Company has recorded leaf sales turnover of Rs274 crore in the year 2016-17leveraging its expertise in all varieties of tobacco. Your Company is continuing domesticsales in addition to exports for maximizing turnover and profits.
The focus on the development of niche varieties and high nicotine tobaccos continued inview of the changing requirements of tobacco in the international market with establishedcustomers. Besides helping develop backward regions it has also helped in improving theCompany's profitability.
It is satisfying to note that your Company's farmers continue to grow tobacco with thelowest pesticide residue levels and low TSNAs (Tobacco Specific Nitrosamines) that arewell within international standards.
Your Company's leaf tobacco function continues to be certified by Registro ItalianoNavale Genova Italy for SA8000 reflecting Company's resolve to follow best internationalpractices in its operations. Your Company's Vice President Leaf was honored with AmbedkarRatna award by Kalpana Saroj foundation in Mumbai and Mahatma Gandhi Samman award by NRIWelfare Society of India in House of Lords London. Your Company is socially responsibleand involved in various programmes like rural sanitation street lighting etc for theimprovement of living conditions in tobacco growing areas.
PRODUCTION AND PLANT MODERNISATION
In order to give competitive edge to the Company's products in the market place yourCompany has offered innovative products to consumers which have been well received.
HUMAN RESOURCE DEVELOPMENT
Your Company's Human Resource Management focus continues to attract and retain the besttalent in an increasingly competitive market place.
Development plans have been drawn up for key managers to assume higher responsibilitiesas well as to enhance their job effectiveness.
As on 31st March 2017 your Company had a strength of 772 employees with 327management staff and 445 workmen.
The Long Term Agreement was signed with the Company's recognised union for a period of3 years commencing from 1st August 2016.
Your Company has constituted an Internal Complaints Committee as per the SexualHarassment of Women at Workplace (Prevention Prohibition and Redressal) Act 2013 and theRules framed there under. No cases were filed during the year under the above Act.
ENVIRONMENT HEALTH & SAFETY (EHS) AND COMMUNITY SERVICES
Your Company continues to keep EHS squarely in the forefront.
Environment Health and Safety (EHS) in day-to-day business operations is given highpriority by your Company. 424 employees and 51 contractors have undergone EHS training and465 employees have undergone fire fighting training programme. Mock fire drills were alsoconducted for workers and management during the period to comply with the Company's EHSguidelines.
Quarterly and annual EHS audits of the Company's operations were carried out to ensurecompliance of EHS requirements. Surveillance Audit of ISO 14001:2004 & OHSAS18001:2007 for the year 2016-17 were conducted by Registro Italiano Navale India (RINA).
All statutory compliances are in place.
The thrust on EHS will continue while emphasizing the focus on Best International Workpractices.
The Profit after Tax of your Company for the year is Rs167.2 crore.
The continuous increase in taxation over the last several years has brought aboutincreased pressure on margins.
b. Treasury Operations
Your Company follows a SLR model (Safety Liquidity and Return) in deployment ofearmarked funds.
PARTICULARS OF LOANS GUARANTEES OR INVESTMENTS
The Company has not taken any loans or given guarantees or made investments in anyother company.
The Credit Rating Information Services India Limited (CRISIL) has re-affirmed therating of your Company to 'FAAA/ Stable' for Fixed Deposit Schemes 'AA+/Stable' for LongTerm Non-convertible Debentures and 'A1+' for Non-fund based liabilities (Letter of Creditand Bank Guarantee). Your Company has stopped accepting fresh deposits for the pastseveral years.
Pursuant to the provisions of Sections 205A(5) and 205C of the Companies Act 1956 theCompany has transferred on due dates the unpaid or unclaimed dividends for the financialyear ended 31st March 2009 to the Investor Education and Protection Fund (IEPF)established by the Central Government.
Further as per the provisions of Investor Education and Protection Fund (Uploading ofInformation regarding unpaid and unclaimed amounts lying with Companies) Rules 2012 theCompany has uploaded the details of unpaid and unclaimed amounts lying with the Company ason 31st March 2016 on the website of the Company (www.vsthyd.com) and also on thewebsite of the Ministry of Corporate Affairs Government of India.
The details of the dividend due for transfer to IEPF as on 31st March 2017 is given inthe Report on Corporate Governance. The Company has commenced the process of complyingwith the provisions of Section 124(6) of the Companies Act 2013 read with the IEPFAuthority (Accounting Audit Transfer and Refund) Rules 2016 and any amendment thereofand will be completed by the due dates as specified under the relevant statutes.
UNCLAIMED SHARE CERTIFICATES
Your Company has communicated to the Members whose share certificates have beenreturned undelivered to the Company that these would be transferred to the UnclaimedSuspense Account if not claimed by them as required under Regulation 34(3) read withSchedule V(F) of the Securities & Exchange Board of India (Listing Obligations andDisclosure Requirements) Regulations 2015 (hereinafter referred as 'ListingRegulations').
The status of unclaimed shares as on 31st March 2017 is given in the Report onCorporate Governance.
In terms of Regulation 34 of the Listing Regulations a Report on Corporate Governancealong with Compliance Certificate issued by Statutory Auditor's of the Company is annexedas 'Annexure A' and forms part of this Report.
Your Company has taken adequate steps for strict compliance with the CorporateGovernance guidelines as amended from time to time.
The Board and Committee Meetings are pre-scheduled and a tentative calendar of themeetings finalised in consultation with the Directors are circulated to them in advance tofacilitate them to plan their schedule. However in case of special and urgent businessneeds the approval is obtained by way of circular resolution. During the year four BoardMeetings and four Audit Committee Meetings were convened and held. The details of theMeetings including composition of Audit Committee are given in the Corporate GovernanceReport. During the year all the recommendations of the Audit Committee were accepted bythe Board.
INTERNAL CONTROL SYSTEMS
a. Your Company maintains an adequate and effective internal control systemcommensurate with the size and complexity. Your Company also has well documented StandardOperating Procedures (SOPs) for various processes which are periodically reviewed forchanges warranted due to business needs.
b. Your Company remains committed to improve effectiveness of internal financialcontrols and processes which would help in efficient conduct of its business operationsensure security to its assets and timely preparation of reliable financial information.
The policies and procedures laid out by your Company capture the control environmentprevalent in the organization. Over a period of three years the business processes ofyour Company are reviewed through an internal audit process which reviews the systems on acontinuous basis. The objective is to identify potential risk areas and come up with acomprehensive risk mitigation plan.
The Audit Committee of your Board met four times during the year. Review of auditobservations covering the operations consideration of accounts on a quarterly basis andmonitoring the implementation of audit recommendations were some of the key areas whichwere dealt with by the Committee. The Statutory Auditors/ Internal Auditors were invitedto attend the Audit Committee Meetings and make presentations covering their observationon adequacy of internal financial controls and the steps required to bridge gaps if any.Chief Financial Officer is a permanent invitee to the Audit Committee and other executivesof the Company are invited to address respond or provide clarifications to relevantissues as and when required.
Your Company has always endeavored to bring together elements of best practices forrisk management in relation to existing and emerging risks faced by it at both strategiclevel and in operations. The Company faces a variety of risks from external and internalsources however the objective is to be aware of different kinds of risks affecting thebusiness. Rather than eliminating these risks the decision making process at your Companyconsiders sensible risk taking and thereby proactive steps are taken to ensure thatbusiness is undertaken in an environment which encourages a reasonable amount of risktaking and enables the Company to leverage market opportunities effectively.
The Board is responsible for determining the nature and extent of the principal risksthat your Company is willing to take to achieve its strategic objectives and formaintaining sound risk management system. With the support of the Audit Committee itcarries out a review of the effectiveness of your Company's risk management processcovering all material risks including strategic financial operational and alsocompliance levels.
Your Company has substantial operations all over the country and competes on basis ofbrand appeal and loyalty product quality and taste packaging marketing and price. Thiscompetitive position is influenced by the economic regulatory and political situationsboth on an all India basis as well as that prevailing at the state level and actions ofthe competitors. The principal risks impacting your Company's business and stepsundertaken to mitigate them are as under:
(i) Regulatory restrictions could have an impact on long-term revenue growthof the Company
The Company operates under increasingly stringent regulatory regime (COTPA guidelineson packaging and labeling advertising and promotion). This further gets complicated withadoption of differing regulatory regime in different states and/or lack of consensus oninterpretation/application.
Such restrictive regulations which are subjected to interpretation could result in notonly penalties being imposed/loss of reputation but also impair the Company's ability tocommunicate with adult smokers and/or to meet consumer expectations through new/innovative brand launches or geographic expansion.
The Company addresses this risk by engaging in continuous social dialogue withstakeholders and regulatory community through industry bodies. At the same time it workson developing strategies and capabilities to be able to launch competitive and consumeracceptable brands within the changing regulatory environment.
(ii) Taxation changes could have an impact on short-term revenue growth ofthe Company
The Company's business is subjected to substantial central and state level taxeswhereby due to differential increase in excise duties in various segments; change inlength of cigarette stick on which excise duty is payable; and tax (VAT) rate differentialbetween various states particularly if it is in case of adjoining states could result incross border movement of goods which could require the Company to take up product pricesand in absence of such action impact its business. The impact increases when due tochange in economic situation consumers disposal income reduces resulting in down-tradingto cheaper cigarettes or alternative tobacco products.
Such risks are addressed by the Company through: (a) engagement with tax authoritiesboth at centre as well as state level as appropriate; (b) regular management review tobuild a brand portfolio across segments as well as across geographies and focus on newbrand creation; and (c) capability build-up through investments in distributioninfrastructure to increase geographical spread.
(iii) Regional disruptions could have an impact on short-term revenue growthof the Company as well as reputation
Regional disturbances through state level restriction on trade or through terrorism andpolitical violence including bandhs strikes has the potential to disrupt the Company'sbusiness operations. Such disruptions result in potential loss of assets and increasedcosts due to more complex supply chain arrangements and/or maintaining inefficientfacilities.
The Company addresses this risk through developing secure multiple sourcing/delivery(supply chain) strategy and through Insurance cover and business continuity planning.
(iv) Counter party risk could have a potential impact on Company's capitaland profitability
The Company generates positive cash flows which are predominantly invested withfinancial institutions and mutual funds. Delay and/or default in settlement on maturity ofsuch investments could result in liquidity and financial loss to Company.
Such risks are mitigated through investment based on principle of Safety Liquidity& Returns (SLR) and with institutions having strong short-term and long-term ratingsassigned by CRISIL.
(v) Data risks
The loss or misuse of sensitive information or its disclosure to outsiders includingcompetitors and trading partners could potentially have a significant adverse impact onthe Company's business operations and/or give rise to legal liability. For this purposethe Company has put in place information technology policies and procedures which arereviewed regularly. Further information technology controls like data back-up mechanismdisaster recovery center authorisation verification etc. have also been established.
CORPORATE SOCIAL RESPONSIBILITY INITIATIVES
Your Company has formulated a Corporate Social Responsibility Policy with the objectiveto promote inclusive growth and equitable development of identified areas by contributingback to the society. Over the years your Company has been involved in social activitieslike provision of clean water etc.
Your Company has been actively discouraging child labour involvement in tobaccogrowing/processing. Your Company has also facilitated installation of solar lights in thetobacco growing areas in association with the village panchayats in the tobacco growingareas.
Pursuant to the provisions of Section 135 and Schedule VII of the Companies Act 2013the Corporate Social Responsibility (CSR) Committee of the Board of Directors was formedto recommend the policy on Corporate Social Responsibility and monitor its implementation.The CSR policy is available on the Company's website at: www.vsthyd.com/i/CSRPolicy.pdf.Your Company has initially decided to focus on 'Sanitation' as a key area.
The Company has with the help of Gramalaya a non-profit organization constructedtoilets in individual homes (of farmers living) in and around Jogulamba Gadwal and Medakdistricts of Telangana where your Company has its operations under the 'Swachh Ghar'programme of your Company. In addition to construction of toilets the villages and thecommunities in the area are also sensitized about the importance of health &sanitation. Over 1000 toilets have already been constructed during the financial year andyour Company has plans to extend it further to other houses in the same area andthereafter extend it to other areas. Your Company has also taken up the identified projectof installing more than 500 solar street lights in villages in the above Districts.
The CSR Policy and the Annual Report on CSR activities is annexed herewith as 'AnnexureB' and forms part of this Report.
BUSINESS RESPONSIBILITY REPORT
The Listing Regulations mandates inclusion of the Business Responsibility Report (BRR)as part of the Annual Report for top 500 listed entities based on market capitalisation.In compliance with the Regulation the BRR is provided as part of this Annual Report.
RELATED PARTY TRANSACTIONS
There were no related party transactions during the year except that in the ordinarycourse of business and on arms length basis. There were no materially significant relatedparty transactions between your Company and the Directors Promoters Key ManagerialPersonnel and other designated persons which may have a potential conflict with theinterest of your Company at large.
Form AOC-2 for disclosure of particulars of contracts/arrangements entered into byyour Company with related parties is annexed herewith as 'Annexure C' and formspart of this Report.
Pursuant to the provisions of the Companies Act 2013 and Listing Regulations theperformance evaluation of the Board the Committees of the Board and individual Directorshas been carried out. The manner in which the evaluation has been carried out has beenexplained in the Corporate Governance Report.
Nomination and Remuneration Committee has formulated a policy relating to remunerationof directors key managerial personnel and other employees which has been approved by theBoard. The Remuneration Policy and the criteria for determining qualification positionattributes and independence of a director are stated in the Corporate Governance Report.
MEETING OF INDEPENDENT DIRECTORS
The performance of the Non-Executive Director the Chairman and the Board as a whole isdone by the Board and the Independent Directors in their exclusive meeting as per thepolicy formulated by the Board in this regard. In addition the Independent Directors insuch meeting also review their role functions and duties under the Companies Act 2013and the flow of information from the management.
In terms of Section 177 of the Companies Act 2013 the Company has formulated aWhistle Blower Policy as a vigil mechanism to encourage all employees and directors toreport any unethical behavior actual or suspected fraud or violation of the Company's'Code of Conduct and Ethics Policy' which also provides for adequate safeguard againstvictimisation of person who use such mechanism and there is a provision for direct accessto the chairman of the Audit Committee in appropriate/exceptional cases. The details ofthe Whistle Blower Policy is given in the Corporate
Governance Report and also posted on the Company's website at: www.vsthyd.com/i/WhistleBlower Policy.pdf.
DIRECTORS AND KEY MANAGERIAL PERSONNEL
Directors retiring by rotation
Mr. Ramakrishna V. Addanki
In accordance with Article 93 of the Articles of Association of your Company Mr.Ramakrishna V. Addanki retires from the Board and being eligible offers himself forre-election. Your Board recommends his reappointment.
Mr. Ramakrishna V. Addanki a nominee of Raleigh Investment Company Limited a BritishAmerican Tobacco (BAT) group Company has been appointed as a Director of the Company witheffect from 21st April 2015 and by the Members at their Meeting held on 12th August2015.
Mr. Addanki is a Commerce graduate from Osmania University and an associate member ofthe Institute of Cost Accountants of India and has over 20 years of experience in thetobacco industry. Having started his career in India Mr. Addanki for the past 18 yearshas been with British American Tobacco Group in different countries with experiences infinance and general management. Mr. Addanki is currently the General Manager for theGroup's Adria cluster headquartered in Croatia covering markets of Bosnia Herzegovinaand Slovenia. Prior to this he was the Finance Director for Group's subsidiary in Turkeyand before that was the CEO of the Group's business in the
Czech Republic and was responsible for the Czech Cluster as a whole. He specializes infinance and general management functions.
He is not a member of any Committee of the Board and is not a director of any othercompany in India.
Mr. Addanki does not hold any shares in the Company and is not related to any otherdirector of the Company.
At the AGM held on 12th August 2014 the Members of your Company appointed Ms. MubeenRafat and Mr. S. Thirumalai as Independent Directors under the Companies Act 2013 for aperiod of five years with effect from 12th August 2014 and 1st October 2014respectively.
All Independent Directors have given declarations as required under Section 149(7) thatthey meet the criteria of independence as laid down under Section 149(6) of the CompaniesAct 2013. None of the Independent Directors are related to any other director of theCompany.
Key Managerial Personnel
The Managing Director Mr. N. Sai Sankar the Deputy Managing Director Mr. DevrajLahiri the Chief Financial Officer Mr. Anish Gupta and the Company Secretary Mr. Phani K.Mangipudi are the Key Managerial Personnel as per the provisions of the Companies Act2013.
DIRECTORS' RESPONSIBILITY STATEMENT
Pursuant to Section 134(5) of the Companies Act 2013 your Directors confirm that:
1. in the preparation of the annual accounts the applicable accounting standards havebeen followed along with proper explanation relating to material departures if any;
2. appropriate accounting policies have been selected and applied consistently.Judgement and estimates which are reasonable and prudent have been made so as to give atrue and fair view of the state of affairs of your Company as on 31st March 2017 and ofthe statement of profit and loss and cash flow of your Company for the period ended 31stMarch 2017;
3. proper and sufficient care has been taken for the maintenance of adequate accountingrecords in accordance with the provisions of the Companies Act 2013 for safeguarding theassets of your Company and for preventing and detecting fraud and other irregularities;
4. the annual accounts have been prepared on a going concern basis;
5. proper internal financial controls have been laid down to be followed by yourCompany and such internal financial controls are adequate and were operating effectively;and
6. proper systems to ensure compliance with the provisions of all applicable laws havebeen devised and such systems were adequate and operating effectively.
SIGNIFICANT & MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS OR TRIBUNALS
There are no significant or material orders passed by the Regulators Courts orTribunals which impact the going concern status of the Company and its future operations.However Members' attention is drawn to the following:
i. Income Tax
Financial Services Business
Your Company had diversified into Financial Services Business and Foods Business in theearly nineties. Subsequently in the year 1998-99 your Company incurred a total loss ofRs38.67 crore in the financial services business of which Rs29.70 crore was claimed asloss under the head 'Income from Business' and Rs8.97 crore was claimed as a capital lossunder the provisions of the Income Tax Act.
The Income Tax Appellate Tribunal allowed the entire amount of Rs38.67 crore as acapital loss. It may be noted that the department had treated the entire loss as a'Speculation Loss'.
Your Company has filed an appeal before the Hon'ble High Court of Andhra Pradesh whichhas been admitted. The matter is yet to be heard.
Further in connection with its divestment from the Foods Business in the financial year1999-00 your
Company had incurred a total loss of Rs53.68 crore of which Rs44.18 crore was claimedas a loss under the head 'Income from Business' and Rs9.50 crore was claimed as a capitalloss under the provisions of the Income Tax Act. The Income Tax Department has disallowedthe entire amount excepting Rs5.70 crore which was allowed as a capital loss. TheCommissioner of Income Tax (Appeals) further allowed Rs11.24 crore out of the balanceamount of Rs47.98 crore on appeal before him and the same was upheld by the Income TaxAppellate Tribunal. Your Company has preferred an appeal against the above order and thematter is now before the Hon'ble High Court of Andhra Pradesh.
Consequent to the above orders the Income Tax Department had issued consequentialorders under Section 154 of the Income Tax Act demanding Rs28.86 crore (revised) which waspaid by your Company.
ii. Luxury Tax
The Hon'ble Supreme Court by its judgement dated 20th January 2005 set aside levy ofluxury tax on tobacconists by various states. The Court had also directed the companies topay back to the state any amount of luxury tax recovered from the customers afterobtaining stay orders from the Court. The Department has alleged that your Company hasfailed to pay an amount of Rs34.86 crore being the luxury tax collected from customers byyour Company after passing of the interim order dated 1st June 1999 to the StateGovernment of Andhra Pradesh which is in violation of the said judgement dated 20thJanuary 2005 and filed the contempt petition against the then Managing Director of yourCompany. The contempt charges were dismissed by the Hon'ble Supreme Court in March 2010.
The State of Andhra Pradesh decided to continue with the legal proceedings for recoveryof luxury tax from your Company by substituting the Company's Managing Director with yourCompany as the Respondent. The Supreme Court appointed an independent Auditor to examineand verify the accounts of your Company for the period 1st April 1999 to 20th January2005 and submit their report as to whether any sum was collected by your Company towardsluxury tax during the operation of the Stay Order dated 1st April 1999. The Auditorforwarded its report to the Supreme Court endorsing your Company's stand. The SupremeCourt after examining the report of the Auditor disposed off the petition with anobservation that no contempt lies against your Company. However the State Government hasbeen given an opportunity to issue a show cause notice to your Company for refund of theluxury tax collected after obtaining interim order from the Supreme Court. Show causenotice should be backed and supported by the evidence the department wishes to rely uponin support of its case and is subject to contest by the parties as per Law.
The Commercial Tax Department has issued a show cause notice and reply to the same hasbeen filed by your Company. The matter was adjudicated on 11th February 2017 and anAssessment Order A.O.No.4208 RC No.LT/SEC/ 01/1/1001/1996-97 dated 13th February 2017was passed by the department confirming the demand. Against the same a Writ Petition inWP No.8240 of 2017 was filed by your Company in the High Court of Judicature at Hyderabadpraying to issue a writ of certiorari quashing the above mentioned Assessment Order. Thematter came up for admission on 9th March 2017 before the Hon'ble High Court of Telangana& Andhra Pradesh and it has been reserved for Orders.
iii. Entry Tax
Several High Courts in the country including those of Andhra Pradesh Kerala TamilNadu and Assam have struck down the levy of entry tax on the ground that it is violativeof Article 301 and not saved under Article 304(b) of the Constitution as it is notcompensatory in the manner required in terms of the Supreme Court judgement in the case ofM/s. Jindal Stainless Limited. Thereafter several states such as Uttar Pradesh Bihar
Haryana and Assam have attempted to re-introduce entry tax by amending the originalActs sparking a fresh round of legal challenges in the high courts. Most of the appealsfiled by the various states and individual companies have been clubbed together.
The Hon'ble Supreme Court in the batch of cases headed by Jai Prakash Associates Vs theState of MP has referred a number of vital questions on levy of entry tax to theConstitutional Bench in terms of Article 145(3) of the Constitution which are stillpending adjudication.
The Hon'ble Supreme Court constituted a 9 Judges Bench and heard the matter and videits Judgment dated 11th November 2016 held that relevant State Entry Tax matters are notviolative on compensatory grounds but if the Act is found to be discriminatory then it isviolative of Article 304(a) of the Constitution. Certain tests have been laid out in theaforesaid judgment namely discrimination and local area applicability to ascertainwhether the respective State Acts are unconstitutional or not and remanded the matter tobe heard by the Regular Bench of the Supreme Court. Your Company believes based on legaladvice that it has defendable grounds on merits and intends to file necessary petitionsif required before the regular bench of the Supreme Court or the respective State High
Courts and contest the matter on the grounds of discrimination and local area.
The Single Bench of Hon'ble High Court of Calcutta struck down the levy of entry taximposed by the State Government of West Bengal in the case of Bharti Airtel and others andaggrieved by the same the State Government has preferred an appeal before the DivisionBench. On identical grounds the Single Bench of Hon'ble High Court of Calcutta allowedthe Writ Petition in favour of your Company with a direction to file implead petition andan early hearing petition before the division bench.
Your Company as directed has filed an implead petition and an early hearingapplication which is pending before the Division Bench of High Court of Calcutta.
a. Wrapping Materials
The Excise department claimed a sum of Rs3.62 crore on the ground that Gay Wrappers(printed paper used for wrapping cigarette packets) had been manufactured and consumed byyour Company without payment of duty during the period April 1996 to March 2002. TheCustoms Excise and Service Tax Appellate Tribunal (CESTAT) Bangalore had allowed yourCompany's appeal against the said demand and set aside the demand of the ExciseDepartment. An appeal against the said Order was filed by the Excise Department and theHon'ble Supreme Court was pleased to allow the appeal by way of remand to CESTAT to decidethe matter afresh and pass an order on merits. The Hon'ble CESTAT heard the matter andallowed the appeal in favour of your Company. Against the CESTAT's order the departmentfiled an appeal before the Supreme Court and when the matter came up for admission theHon'ble Supreme Court tagged your Company matter to be heard along with another identicalmatter pending before it (Sri Kumar Agencies case).
b. Cigarette manufacture in North Eastern states
The Excise Department had demanded a sum of Rs31.20 crore along with interest ofRs12.69 crore from the Company's former contract manufacturers consequent upon thejudgement of the Hon'ble Supreme Court upholding the withdrawal of exemptions granted inthe North Eastern states. Thereafter a total sum of Rs39.06 crore was paid to theDepartment. A Division Bench of the Gauhati High Court confirmed the judgement of thesingle judge and held that interest was also payable for the period 1st August 2003 to7th February 2006 on the principal amount already repaid. Appeals have been filed in theSupreme Court against the said judgements of the Gauhati High Court which were admittedbut no stay of the said judgements was granted.
c. Tobacco Refuse
Your Company has been receiving periodical show cause notices demanding recovery ofduty on cut tobacco used in the manufacture of tobacco refuse together with interest andpenalty thereon from January 2005 to October 2013 amounting to Rs15.92 crore. All thepending appeals before CESTAT in this matter until October 2013 were allowed in favour ofyour Company. Against the said orders the department preferred an appeal before theHon'ble Supreme Court on which hearing is pending. Show cause notices for subsequentperiod have been received and same are pending before original authority.
d. Service Tax
Your Company has received show cause notices from the Excise Department seeking to denyCENVAT credit availed on service tax paid by various service providers on the ground thatthe same are not in relation to the manufacture of final products. Upon adjudicationcredit on most of the services were allowed in favour of your Company however some ofthem are contested by the department before CESTAT. Cross appeal has been filed by yourCompany before CESTAT. One of the appeals filed by your Company for the period April 2008was heard and allowed by CESTAT by way of remand to the original authority to be decidedin light of earlier judicial pronouncements.
PUBLIC INTEREST LITIGATION (PIL)
i) The two PILs filed in the Madras High Court and the Andhra Pradesh High Courtagainst the Central Government and the cigarette manufacturers including your Companyseeking strict implementation of Cigarettes and Other Tobacco Products (Prohibition ofAdvertisement And Regulation of Trade and Commerce Production Supply and Distribution)Act 2003 (COTP
Act) and Rules are pending. The Madras High Court disposed off the PIL on the linesthat the Government has to take necessary steps to build laboratories to check the tar andnicotine content in the cigarettes.
ii) Your Company has been impleaded in the petition filed in the Supreme Court by anNGO called 'Centre for Transforming India' against the Union of India along with othercigarette manufacturers Tobacco Institute of India Bidi Manufacturers and BidiManufacturers' Association seeking prohibition/ban on the manufacture storage and sale ofall forms of tobacco within the territory of India.
iii) A PIL was filed before the Uttarakhand High Court relating to printing of Tar-Niccontents on cigarette packets. The High Court passed an Order allowing the petition anddirecting ban on sale of loose cigarettes without printing health warning. The Court hasalso ordered ban on sale of cigarettes in the state of Uttarakhand if the union does notprescribe safe or maximum permissible limit of nicotine & tar contents in eachcigarettes or label or package.
A review petition has been filed by your Company along with others against the orderand it was disposed off by the High Court of Uttarakhand in favour of your Company.
Petitions have also been filed in other courts such as High Court of Jabalpur NationalGreen Tribunal Delhi seeking ban on sale of cigarettes.
The suit for infringement and passing off filed by ITC Limited against your Companyalleging that your Company had violated ITC Limited's 'Gold Flake' trade mark by using adeceptively similar get up and trade dress consisting of a combination of red and goldcolors on its 'Special' brand of cigarettes is still pending in the Hon'ble Calcutta HighCourt and the trial is yet to begin. ITC's application for temporary injunction wasrefused by the single bench of the Hon'ble Calcutta High Court. Appeal was filed by ITCand the Division Bench without allowing the appeal directed the hearing of the Suit to beexpedited. Your Company however has been directed to submit the sales figures of the'Special' brand of cigarettes every month to the Court which is being duly complied with.
FINANCIAL SERVICES BUSINESS
The Company Petition filed by the Official Liquidator in the Hon'ble High Court ofAndhra Pradesh seeking directions against some of the Ex-Directors of ITC Agro TechFinance and Investments Limited (ITCATF) the Company in liquidation into which one ofthe subsidiaries of your Company viz. VST Investments Limited was amalgamated to file aStatement of Affairs is still pending.
In terms of the Order dated 10th July 2007 the Division Bench of the Hon'ble HighCourt of Andhra Pradesh had directed the Regional Director Department of CorporateAffairs Chennai to conduct an investigation and submit a report showing the persons whopromoted ITCATF and the persons who were responsible in conducting its affairs until itswinding up. A comprehensive report was prepared and filed in the Court by the RegionalDirector in July 2008. Further the Division bench against the appeal filed by one of theEx-Directors of ITCATF remanded the matter to the Company Judge to decide afresh keepingin view the report submitted by the Regional Director. All the matters are still pendingfinal adjudication.
THE CIGARETTES AND OTHER TOBACCO PRODUCTS (PROHIBITION OF ADVERTISEMENT AND REGULATIONOF TRADE AND COMMERCE PRODUCTION SUPPLY AND DISTRIBUTION) ACT 2003 (COTPA)
i. In view of the provisions of COTPA various restrictions such as ban on advertisingin print and visual media ban on outdoor advertising regulation of in-store advertisingprohibition of sale of cigarettes to persons below the age of 18 years etc. have been inforce. Printing of pictorial warnings on cigarette packets which came into effect from31st May 2009 were further revised with effect from 1st December 2011. A new set ofpictorial warnings were notified to come into force with effect from 1st April 2013. InOctober 2014 the Government notified a new set of pictorial warning covering 85% of thefront and back side of the packets to take effect from 1st April 2015. However afterextension the same have now been implemented from 1st April 2016 and is being dulycomplied with by your Company.
ii. Some tobacco manufacturers have challenged various provisions of COTPA and Rulesmade thereunder in different high courts across the country. The Union Government filedtransfer petitions in the Hon'ble Supreme Court seeking to transfer 31 pending writpetitions from various high courts to the Hon'ble Supreme Court. All the transferpetitions were allowed and the writ petitions have thus been moved to the Hon'ble SupremeCourt for final adjudication.
iii. Your Company had also filed a writ petition in the Hon'ble High Court of AndhraPradesh challenging The Cigarettes and Other Tobacco Products (Packaging & Labelling)Rules 2006 and the Amendment Rules 2008 on the grounds inter alia that they are ultravires of COTPA and therefore the notifications issued there under (including thoseseeking implementation of graphic health warnings) should be quashed. The said writpetition has been admitted but no interim orders were passed by the Hon'ble Court.
iv. The Government of India Ministry of Health and Family Welfare on 13th January2015 as part of pre-legislative consultation invited views and comments from thestakeholders and the public on the proposed Cigarettes and Other Tobacco Products(Prohibition of Advertisement and Regulation of Trade and Commerce Production Supply andDistribution) Amendment Bill 2015 which proposes further restrictions on the industry andmore stringent penalty provisions. Your Company as a stakeholder has expressed objectionsto the said amendment bill.
v. Before the High Court of Karnataka a Writ Petition was filed by Tobacco Instituteof India (TII) on behalf of your Company and other manufacturers against the proposednotification dated 15th October 2014 by the Health Ministry to print health warning onboth sides of the pack occupying 85% of space. The 85% health warning was to come intoeffect from 1st April 2016. Your Company also filed a Writ Petition before the High Courtbench at Dharwad against the implementation of 85% health warning. The Hon'ble SupremeCourt on hearing a PIL filed by Health for Millions constituted a Bench before theKarnataka High Court to hear all the matters relating to graphical health warning. TheWrit Petitions filed by TII and your Company are being heard before the Bangalore Bench.The Bench continuously heard the matters till 28th February 2017 and the matter has nowbeen reserved for judgement.
The Government of Andhra Pradesh had filed a land grabbing case against your Company in1991 in relation to a piece and parcel of vacant land which has been under possession andoccupation by your Company for over four decades. By its judgement dated 28th July 2010the Special Court had held that your Company is not a land grabber but had given the StateGovernment the right to initiate proceedings to recover possession of the land at somefuture date. Against this part of the judgement your Company had filed a writ petition inthe Hon'ble High Court of Andhra Pradesh to expunge that part of the
Order giving such liberty to the Department despite the fact that your Company hasalready been declared not to be a land grabber. The writ petition is still pending. TheState Government has also filed a writ petition in the Hon'ble High Court of AndhraPradesh seeking to set aside the said judgement of the Land Grabbing Court. An interimOrder was passed restraining your Company from changing the status of the land or creatingany third party interest therein. Your Company has taken all the necessary steps forspeedy disposal of the above writ petitions which are pending before the Court.
PARTICULARS OF EMPLOYEES
The information required pursuant to Section 197 of the Companies Act 2013 read withRule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules2014 and any amendment thereof in respect of employees of the Company are annexedherewith as 'Annexure D' and forms part of this Report. The statement containingparticulars of employees as required under Section 197 of the Act read with Rule 5(2) ofCompanies (Appointment and Remuneration of Managerial Personnel) Rules 2014 is providedin a separate annexure forming part of this Report. However in terms of Section 136 ofthe Act the Report and Accounts are being sent to the Members and others entitledthereto excluding the information on employees' particulars which is available forinspection by the Members at the Registered Office of the Company during business hours onworking days of the Company up to the date of the ensuing AGM. In case any Member isinterested in obtaining a copy thereof such Member may write to the Company Secretary ofthe Company.
The Nomination and Remuneration Committee of the Company has affirmed that theremuneration is as per the Remuneration Policy of the Company.
Your Directors take this opportunity to record their deep appreciation of thecontinuous support and contribution from all employees of your Company.
EXTRACT OF ANNUAL RETURN
As required under Section 92(3) of Companies Act 2013 and Rule 12(1) of Companies(Management and Administration) Rules 2014 an extract of Annual Return in Form MGT-9 isannexed as 'Annexure E' and forms part of this Report.
M/s. B S R & Associates LLP Chartered Accountants were recommended forappointment as the Statutory Auditors of the Company to hold office from the conclusion ofthe 85th AGM to the conclusion of the 90th AGM. In terms of the first proviso to Section139 of the Companies Act 2013 the Auditors' appointment has to be ratified at every AGM.Accordingly the appointment of M/s. B S R & Associates LLP Chartered AccountantsFirm's Registration Number:116231W/W-100024 as the statutory auditors of the Company isplaced for ratification by the Members. The Company has received a certificate from M/s. BS R & Associates LLP to the effect that they are not disqualified from continuing toact as Auditors and would be in accordance with the provisions of Sections 139 and 141 ofthe Companies Act 2013 and Companies (Audit and Audit Rules) 2014. The Report given bythe Auditors on the financial statements of the Company is part of the Annual Report.There has been no qualification reservation or adverse remark or disclaimer in theirReport. During the year under review the Auditors had not reported any matter underSection 143(12) of the Companies Act 2013 and hence no detail is required to bedisclosed under Section 134(3)(ca) of the Companies Act 2013.
Pursuant to the provisions of Section 204 of the Companies Act 2013 and Rule 9 of theCompanies (Appointment and Remuneration of Managerial Personnel) Rules 2014 the Companyhad appointed Dr. K.R. Chandratre Company Secretary in Whole-time Practice asSecretarial Auditor of the Company for the financial year 2016-17. The Secretarial AuditReport is annexed herewith as 'Annexure F' and forms part of this Annual Report.
There are no qualifications reservations or adverse remarks in the Secretarial AuditReport.
CONSERVATION OF ENERGY TECHNOLOGY ABSORPTION FOREIGN EXCHANGE EARNINGS AND OUTGO
Information in accordance with clause (m) of sub-section (3) of Section 134 of theCompanies Act 2013 read with
Rule 8 of Companies (Accounts) Rules 2014 is given in the 'Annexure G' formingpart of this Report.
Your Company has stopped accepting fresh deposits for several years now. As on 31stMarch 2017 your Company does not have any deposits for the purpose of its business.
Despite adverse market conditions your Company is well placed to exploit opportunitiesthrough innovative new brand launches coupled with expansion of operational areas.
MATERIAL CHANGES AND COMMITMENTS
There have been no material changes and commitments made between the end of thefinancial year of this Company and the date of this Report.
The Directors are grateful to all valuable stakeholders of the Company viz. customersshareholders dealers vendors banks and other business associates for their excellentsupport rendered during the year. The Directors also acknowledge the unstinted commitmentand valued contribution of all employees of the Company.
On behalf of the Board
RAYMOND S. NORONHA
Dated this 18th day of April 2017.
Azamabad Hyderabad - 500 020