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REPORT OF THE BOARD OF DIRECTORS & MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31ST MARCH, 2016
The Directors of your Company have pleasure in presenting before you the Annual Report together with the Audited Statements of Accounts for the year ended 31st March, 2016.
The Directors are pleased to recommend a dividend of 700% on the paid up equity share capital of the Company, which amounts to Rs.70 per equity share of Rs. 10 each for consideration and approval of Members at the Annual General Meeting. The total outgo amounts to Rs. 130.10 crore including dividend distribution tax of Rs.22.01 crore. It is proposed to carry forward an amount of Rs.15.25 crore to General Reserve.
The paid up Equity Share Capital as on 31st March, 2016 was Rs.1544.19 lakhs. The Company has neither issued shares with differential rights as to dividend, voting or otherwise nor issued shares (including sweat equity shares) to the employees or Directors of the Company, under any Scheme.
No disclosure is required under Section 67(3)(c) of Companies Act, 2013 in respect of voting rights not exercised directly by the employees of the Company as the provisions of the said Section are not applicable.
INDUSTRY STRUCTURE & DEVELOPMENT
The trend of steep & discriminatory taxation continues with yet another year of excise revision in the Union Budget presented in February 2015. The duty on most affordable 64mm cigarettes was increased by 22% vs. 12% for other segments. Recurrent & harsh increases in state taxes continue to pose a challenge for the industry. VAT rate in a key state of Uttar Pradesh was increased from 25% to 40% in 2015–16.
Inevitable increase in prices on account of steep taxation has led to fourth consecutive year of volume decline for legitimate players. As legal industry takes up prices, non duty paid cigarettes are getting a fillip & registering exponential growth.
Stringent regulatory measures have been enforced by central & state governments. Some key states have made sale of loose cigarettes illegal. Pictorial warning currently on one panel has been extended to both panels with a significant increase in size. Moving forward, these severe regulations along with growth of low priced, non duty paid cigarettes will hurt legitimate players further.
Discriminatory excise hike in 64mm size of cigarettes affects your Company more than competition as your Company largely operates in the value segment.
In spite of a challenging operating environment your Company has minimised volume decline by leveraging its portfolio mix. New brands, Total of 69mm size & Editions of 84mm size, have registered consistent growth based on value proposition. Your Company's existing trademarks such as Special, Moments & Charms have also delivered a strong performance in key markets.
Your Company stands committed to fortify & develop a robust portfolio based on superior understanding of evolving consumer preferences. Your Company continues to invest in infrastructure to increase geographic presence.
Cigarette volumes of your Company during 2015–16 stood at 7332 mns compared to 7540 mns in 2014–15. Though disproportionately affected by excise hike, your Company's performance is better relative to general industry trends.
Your Company has recorded leaf sales turnover of Rs.272 crore, in the year 2015–16 leveraging its expertise in all varieties of tobacco. Your Company is continuing domestic sales in addition to exports for maximising turnover and profits.
The focus on the development of niche varieties and high nicotine tobaccos continued in view of the changing requirements of tobacco in the international market with established customers. Besides helping develop backward regions, it has also helped in improving the Company's profitability. The Oriental project continues with improved agronomic practices.
It is satisfying to note that your Company's farmers continue to grow tobacco with the lowest pesticide residue levels and low TSNAs (Tobacco Specific Nitrosamaines) that are well within international standards.
Your Company's leaf tobacco function continues to be certified by Registro Italiano Navale, Genova, Italy for SA8000 reflecting Company's resolve to follow best international practices in its operations. Your Company is socially responsible and involved in various programmes for the improvement 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, your Company has offered innovative products to consumers, which have been well received. Your Company is constructing a new Primary Manufacturing Division at Toopran Mandal in Medak District which is expected to be operational in the second half of the financial year 2016–17.
HUMAN RESOURCE DEVELOPMENT
Your Company's Human Resource Management focus continues to attract and retain the best talent, in an increasingly competitive market place.
Development plans have been drawn up for key managers to assume higher responsibilities as well as to enhance their job effectiveness.
Your Company has constituted an Internal Complaints Committee as per the Sexual Harassment of Women at Workplace (Prevention, Prohibition and
Redressal) Act, 2013 and the Rules framed there under. No cases were filed during the year under the above Act.
As on 31st March, 2016, your Company had a strength of 825 employees, with 325 management staff and 500 workmen.
ENVIRONMENT, HEALTH & SAFETY (EHS) AND COMMUNITY SERVICES
Your Company continues to keep EHS squarely in the forefront.
Safety Innovation Award for the year 2015 was awarded to your Company by Institution of Engineers India, New Delhi. Environment, Health and Safety (EHS) in day–to–day business operations is given very high priority by your Company. 489 employees and 35 contractors have undergone EHS training and 504 employees have undergone fire fighting training programme. Mock fire drills were also conducted for workers and management during the period to comply with the Company's EHS guidelines.
Quarterly and annual EHS audits of the Company's operations were carried out to ensure compliance of EHS requirements. Surveillance Audit of ISO 14001: 2004 & OHSAS 18001: 2007 for the year 2015–16 were conducted by Registro Italiano Navale India (RINA).
All statutory compliances are in place.
The thrust on EHS will continue while emphasising the focus on best international work practices.
The Profit after Tax of your Company for the year is Rs.153.11 crore.
The continuous increase in taxation over the last several years has brought about increased pressure on margins.
b. Treasury Operations
Your Company follows a SLR model (Safety, Liquidity and Return) in deployment of earmarked funds.
PARTICULARS OF LOANS, GUARANTEES OR INVESTMENTS
The Company has not taken any loans or given guarantees or made investments in any other company.
The Credit Rating Information Services India Limited (CRISIL) has re–affirmed the rating of your Company to 'FAAA/ Stable' for Fixed Deposit Schemes, 'AA+/Stable' for Long Term Non–Convertible Debentures and 'A1+' for Non–fund based liabilities (Letter of Credit and Bank Guarantee). Your Company has stopped accepting fresh deposits for the past several years.
Pursuant to the provisions of Section 205A(5) and 205C of the Companies Act, 1956, the Company has transferred on due dates, the unpaid or unclaimed dividends for the financial year ended 31st March, 2008 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 of Information regarding unpaid and unclaimed amounts lying with Companies) Rules, 2012, the Company has uploaded the details of unpaid and unclaimed amounts lying with the Company as on 31st March, 2015 on the website of the Company (www.vsthyd.com ), and also on the website of the Ministry of Corporate Affairs, Government of India.
The details of the dividend due for transfer to IEPF as on 31st March, 2016 is given in the Report on Corporate Governance.
UNCLAIMED SHARE CERTIFICATES
Your Company has communicated to the Members whose share certificates have been returned undelivered to the Company that these would be transferred to the Unclaimed Suspense Account if not claimed by them, as required under Regulation 34(3) read with Schedule V(F) of the Securities & Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred as 'Listing Regulations').
The status of unclaimed shares as on 31st March, 2016 is given in the Report on Corporate Governance.
In terms of Regulation 34 of the Listing Regulations, a Report on Corporate Governance along with Compliance Certificate issued by Statutory Auditor's of the Company is annexed as 'Annexure A' and forms part of this Report.
Your Company has taken adequate steps for strict compliance with the Corporate Governance guidelines, as amended from time to time.
The Board and Committee meetings are pre–scheduled and a tentative calendar of the meetings finalised in consultation of the Directors are circulated to them in advance to facilitate them to plan their schedule. However, in case of special and urgent business needs, the approval is obtained by way of circular resolution. During the year, four Board Meetings and four Audit Committee Meetings were convened and held. The details of the meetings including composition of Audit Committee are given in the Corporate Governance Report. During the year, all the recommendations of the Audit Committee were accepted by the Board.
INTERNAL CONTROL SYSTEMS
a. Your Company maintains an adequate and effective internal control system commensurate with the size and complexity. Your Company also has well documented Standard Operating Procedures (SOPs) for various processes which are periodically reviewed for changes warranted due to business needs.
b. Your Company remains committed to improve effectiveness of internal financial controls and processes which would help in efficient conduct of its business operations, ensure security to its assets and timely preparation of reliable financial information.
The policies and procedures laid out by your Company capture the control environment prevalent in the organisation. Over a period of three years, the business processes of your Company is reviewed through an internal audit process which reviews the systems on a continuous basis. The objective is to identify potential risk areas and come up with a comprehensive risk mitigation plan.
The Audit Committee of your Board met four times during the year. Review of audit observations covering the operations, consideration of accounts on a quarterly basis and monitoring the implementation of audit recommendations were some of the key areas which were dealt with by the Committee. The Statutory Auditors/ Internal Auditors were invited to attend the Audit Committee meetings and make presentations covering their observation on 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 executives of the Company are invited to address, respond or provide clarifications to relevant issues and when required.
Your Company has always endeavored to bring together elements of best practices for risk management in relation to existing and emerging risks faced by it at both strategic level and in operations. The Company faces a variety of risks from external and internal sources; however, the objective is to be aware of different kinds of risks affecting the business. Rather than eliminating these risks, the decision making process at your Company considers sensible risk taking and thereby proactive steps are taken to ensure that business is undertaken in an environment which encourages a reasonable amount of risk taking and enables the Company to leverage market opportunities effectively.
The Board is responsible for determining the nature and extent of the principal risks that your Company is willing to take to achieve its strategic objectives and for maintaining sound risk management system. With the support of the Audit Committee, it carries out a review of the effectiveness of your Company's risk management process covering all material risks including strategic, financial, operational and compliance.
Your Company has substantial operations all over the country and competes on the basis of brand appeal and loyalty, product quality and taste, packaging, marketing and price. This competitive position is influenced by the economic, regulatory and political situations both on an all India basis as well as that prevailing at the state level, and actions of the competitors. The principal risks impacting your Company's business and steps undertaken to mitigate them are as under:
i) Regulatory restrictions could have an impact on long term revenue growth of the Company.
The Company operates under increasingly stringent regulatory regime (COTPA guidelines on packaging and labelling, advertising and promotion). This further gets complicated with adoption of differing regulatory regime in different states and/or lack of consensus on interpretation/application.
Such restrictive regulations which are subjected to interpretation could result in not only penalties being imposed/loss of reputation, but also impair the Company's ability to communicate 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 with stakeholders and regulatory community through industry bodies. At the same time it works on developing strategies and capabilities to be able to launch competitive and consumer–acceptable brands within the changing regulatory environment.
(ii) Taxation changes could have an impact on short term revenue growth of the Company.
The Company's business is subjected to substantial central and state level taxes whereby due to differential increase in excise duties in various segments; change in length of cigarette stick on which excise duty is payable; and tax (VAT) rate differential between various states particularly if it is in case of adjoining states could result in cross border movement of goods, could require the Company to take up product prices and in absence of such action, impact its business. The impact increases when due to change in economic situation, consumers' disposal income reduces resulting in down–trading to cheaper cigarettes or alternative tobacco products.
Such risks are addressed by the Company through (a) engagement with tax authorities both at centre as well as state level where appropriate; (b) regular management review to build a brand portfolio across segments as well as across geographies and focus on new brand creation; and (c) Capability build–up through investments in distribution infrastructure to increase geographical spread.
(iii) Regional disruptions could have an impact on short–term revenue growth of the Company as well as reputation.
Regional disturbances through state level restriction on trade or through terrorism and political violence including bandhs, strikes, has the potential to disrupt the Company's business operations. Such disruptions result in potential loss of assets and increased costs due to more complex supply chain arrangements and/or maintaining inefficient facilities.
The Company addresses this risk through developing multiple sourcing/delivery (supply chain) strategy and through insurance cover and business continuity planning.
(iv) Counter party risk could have a potential impact on the Company's capital and profitability.
The Company generates positive cash flows which are predominantly invested with financial institutions and mutual funds. Delay and/or default in settlement on maturity of such investments could result in liquidity and financial loss to the 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 ratings assigned by CRISIL.
(v) Data risks
The loss or misuse of sensitive information, or its disclosure to outsiders, including competitors and trading partners, could potentially have a significant adverse impact on the Company's business operations and/or give rise to legal liability. For this purpose, the Company has put in place information technology policies and procedures which are reviewed regularly. Further, information technology controls like data back–up mechanism, disaster recovery center, authorisation verification, etc., have also been established.
CORPORATE SOCIAL RESPONSIBILITY INITIATIVES
Your Company has formulated a Corporate Social Responsibility Policy with the objective to promote inclusive growth and equitable development of identified areas by contributing back to the society. Over the years, your Company has been involved in social activities like provision of clean water, construction of school buildings etc.
Your Company has been actively discouraging child labour involvement in tobacco growing/processing. Your Company has also facilitated installation of solar lights in the tobacco growing areas in association with the village panchayats in the tobacco growing areas.
Pursuant to the provisions of Section 135 and Schedule VII of the Companies Act, 2013, the Corporate Social Responsibility (CSR) Committee of the Board of Directors was formed to 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 which requires attention as it believes improving sanitation has a direct impact on health which in turn has an impact on overall productivity and the quality of life of the common people, thereby making a positive impact on society.
The Company has with the help of Gramalaya, a non–profit organisation constructed toilets in individual homes
of villages in and around Mahaboobnagar, Kurnool and Raichur villages in the states of Telangana, Andhra Pradesh and Karnataka where your Company has its leaf operations, under the 'Swachh Ghar' programme of your Company. In addition to construction of toilets, the villages and the communities in the area are also sensitised about the importance of health & sanitation. Over 1,100 toilets have already been constructed during the financial year and your Company has plans to extend it further to other houses in the same area and thereafter extend it to other areas. Your Company has also taken up the environment sustainability project of installing solar street lights in villages in the above states. The CSR Policy and the Annual Report on CSR activities is annexed herewith as 'Annexure B' and forms part of this Report.
RELATED PARTY TRANSACTIONS
There were no related party transactions during the year except that in the ordinary course of business and on arms length basis. There were no materially significant related party transactions between your Company and the Directors, Promoters, Key Managerial Personnel and other designated persons which may have a potential conflict with the interest of your Company at large.
Form AOC–2 for disclosure of particulars of contracts/arrangements, entered into by your Company with related parties is annexed herewith as 'Annexure C' and forms part of this Report.
Pursuant to the provisions of the Companies Act, 2013 and Listing Regulations, the performance evaluation of the Board, the Committees of the Board and individual Directors has been carried out. The manner in which the evaluation has been carried out has been explained in the Corporate Governance Report.
Nomination and Remuneration Committee has formulated a policy relating to remuneration of directors, key managerial personnel and other employees which has been approved by the Board. The Remuneration Policy and the criteria for determining qualification, position attributes 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 is done by the Board and the Independent Directors in their exclusive meeting as per the policy formulated by the Board in this regard. In addition, the independent directors in such meeting also review their role, functions and duties under the Companies Act, 2013 and the flow of information from the management.
In terms of Section 177 of the Companies Act, 2013, the Company has formulated a Whistle Blower Policy as a vigil mechanism to encourage all employees and directors to report 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 against victimisation of person who use such mechanism and there is a provision for direct access to the Chairman of the Audit Committee in appropriate/exceptional cases. The details of the Whistle Blower Policy is given in the Corporate Governance Report and also posted on the Company's website at: www.vsthyd.com/i/Whistle Blower Policy.pdf.
DIRECTORS AND KEY MANAGERIAL PERSONNEL
Directors retiring by rotation
Mr. Devraj Lahiri
In accordance with Article 93 of the Articles of Association of your Company, Mr. Devraj Lahiri retires from the Board and being eligible, offers himself for re–election. Your Board recommends his re–appointment.
Mr. Devraj Lahiri has been appointed a Whole–time Director of the Company for a period of five years with effect from 1st August, 2011, by the Members at their meeting held on 12th July, 2012.
Directors' Resignation/ Appointment
Mr. Devraj Lahiri
The Board of Directors of your Company ('the Board') at its meeting held on 20th April, 2016 on the recommendation of Nomination & Remuneration Committee approved the appointment of Mr. Devraj Lahiri as Deputy Managing Director of the Company, with effect from 1st July, 2016 to 27th November, 2017 (both days inclusive), subject to the approval of the Members. The Deputy Managing Director shall also be a Key Managerial Personnel under Section 203 of the Companies Act, 2013.
Mr. Devraj Lahiri, aged 43 years, is a Commerce Graduate from St. Xavier's College, Kolkata and Masters in Business Administration from Indian Institute of Social Welfare and Business Management, Kolkata. He joined the Company in the year 2001 and has made significant contributions during his association with the Company. He was elevated to the level of Marketing Head and was appointed as Whole–time Director of the Company with effect from 1st August, 2011. He is a member of the Corporate Social Responsibility Committee, Committee of Directors and Stakeholders Relationship Committee of the Company and is also a director on the board of the Tobacco Institute of India. He has been instrumental in the growth of the Company and has successfully launched various new brands. Mr. Lahiri does not hold any shares in the Company and is not related to any other director of the Company.
A suitable resolution is being put up for your approval.
British American Tobacco (BAT) Group Nominee
Mr. James H. Yamanaka, Director has resigned with effect from close of business on 16th April, 2015 and Mr. Ramakrishna V. Addanki was nominated by the Raleigh Investment
Company Limited, a BAT group Company as a Director of your Company in the place of Mr. James H. Yamanaka with effect from 21st April, 2015 and his appointment as Non–Executive Director of your Company was approved by the Members in the Annual General Meeting held on 12th August, 2015.
At the Annual General Meeting held on 12th August, 2014, the Members of your Company appointed Ms. Mubeen Rafat and Mr. S. Thirumalai as Independent Directors under the Companies Act, 2013 for a period of five years with effect from 12th August, 2014 and 1st October, 2014, respectively.
All Independent Directors have given declarations as required under Section 149(7) that they meet the criteria of independence as laid down under Section 149(6) of the Companies Act, 2013. None of the Independent Directors are related to any other director of the Company.
Key Managerial Personnel
The Managing Director Mr. N. Sai Sankar, the Whole–time Director Mr. Devraj Lahiri, the Chief Financial Officer Mr. Anish Gupta and the Company Secretary Mr. Nitesh Bakshi are the Key Managerial Personnel as per the provisions of the Companies Act, 2013.
DIRECTORS' RESPONSIBILITY STATEMENT
Pursuant to Section 134 of the Companies Act, 2013, your Directors confirm that:
1. in the preparation of the annual accounts, the applicable accounting standards have been 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 a true and fair view of the state of affairs of your Company as at the end of the financial year 2015–16 and of the profit of your Company for the period;
3. proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets 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 your Company 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 have been 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 or Tribunals 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 the early nineties. Subsequently in the year 1998–99, your Company incurred a total loss of Rs.38.67 crore in the financial services business of which Rs.29.70 crore was claimed as loss under the head 'Income from Business' and Rs.8.97 crore was claimed as a capital loss under the provisions of the Income Tax Act.
The Income Tax Appellate Tribunal allowed the entire amount of Rs.38.67 crore as a capital 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 which has been admitted. The matter is yet to be heard.
Further in connection with its divestment from the Foods Business in the financial year 1999–00, your Company had incurred a total loss of Rs.53.68 crore, of which Rs.44.18 crore was claimed as a loss under the head 'Income from Business' and Rs.9.50 crore was claimed as a capital loss under the provisions of the Income Tax Act. The Income Tax Department has disallowed the entire amount excepting Rs.5.70 crore which was allowed as a capital loss. The Commissioner of Income Tax (Appeals) further allowed Rs.11.24 crore out of the balance amount of Rs.47.98 crore, on appeal before him and the same was upheld by the Income Tax Appellate Tribunal. Your Company has preferred an appeal against the above order and the matter is now before the Hon'ble High Court of Andhra Pradesh.
Consequent to the above orders, the Income Tax Department had issued consequential orders under Section 154 of the Income Tax Act demanding Rs.28.86 crore (revised) which was paid by your Company.
ii. Luxury Tax
The Hon'ble Supreme Court by its judgement dated 20th January, 2005 set aside levy of luxury tax on tobacconists by various states. The Court had also directed the companies to pay back to the state any amount of luxury tax recovered from the customers after obtaining stay orders from the Court. The Department has alleged that your Company has failed to pay an amount of Rs.34.86 crore being the luxury tax collected from customers by your Company after passing of the interim order dated 1st June, 1999, to the State Government of Andhra Pradesh which is in violation of the said judgement dated 20th January, 2005 and filed the contempt petition against the then Managing Director of your Company. An amount of Rs.29.81 crore has also been claimed as interest thereon @ 24% per annum. The contempt charges against the then Managing Director of your Company were dismissed by the Hon'ble Supreme Court in March, 2010.
The State of Andhra Pradesh decided to continue with the legal proceedings for recovery of luxury tax from your Company by substituting the Company's Managing Director with your Company as the Respondent. The Supreme Court appointed an independent Auditor to examine and verify the accounts of your Company for the period 1st April, 1999 to 20th January, 2005 and submit their report as to whether any sum was collected by your Company towards luxury tax during the operation of the Stay Order dated 1st April, 1999. The
Auditor forwarded its report to the Supreme Court endorsing your Company's stand. The Supreme Court, after examining the report of the Auditor, disposed off the petition with an observation that no contempt lies against your Company. However, the State Government has been given an opportunity to issue a show cause notice to your Company for refund of the luxury tax collected afterobtaining interim order from the Supreme Court. Show cause notice should be backed and supported by the evidence the department wishes to rely upon in 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 has been filed by your Company.
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 violative of Article 301 and not saved under Article 304(b) of the Constitution, as it is not compensatory in the manner required in terms of the Supreme Court judgement in the case of M/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 original acts, sparking a fresh round of legal challenges in the high courts. Most of the appeals filed 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 the State of MP has referred a number of vital questions on levy of entry tax, to the Constitutional Bench in terms of Article 145(3) of the Constitution which are still pending adjudication.
The Single Bench of Hon'ble High Court of Calcutta struck down the levy of entry tax imposed by the State Government of West Bengal in the case of Bharti Airtel and others and aggrieved by the same, the State Government has preferred an appeal before the Division Bench. On identical grounds, the Single Bench of Hon'ble High Court of Calcutta allowed the Writ Petition in favour of your Company with a direction to file implead petition and an early hearing petition before the division bench.
Your Company, as directed, has filed an implead petition and an early hearing application which is pending before the Division Bench of High Court of Calcutta.
a. Wrapping Materials
The Excise Department claimed a sum of Rs.3.62 crore (including penalty and interest @ 24%) on the ground that Gay Wrappers (printed paper used for wrapping cigarette packets) had been manufactured and consumed by your Company without payment of duty during the period April 1996 to March 2002. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore had allowed your Company's appeal against the said demand and set aside the demand of the Excise Department. An appeal against the said Order was filed by the Excise Department and the Hon'ble Supreme Court was pleased to allow the appeal by way of remand to CESTAT to decide the matter afresh and pass an order on merits. The Hon'ble CESTAT heard the matter and allowed the appeal in favour of your Company.
b. Cigarette manufacture in North Eastern states
The Excise Department had demanded a sum of Rs.31.20 crore along with interest of Rs. 12.69 crore from the Company's former contract manufacturers consequent upon the judgement of the Hon'ble Supreme Court upholding the withdrawal of exemptions granted in the North Eastern states. Thereafter, a total sum of Rs.39.06 crore was paid to the Department. A Division Bench of the Gauhati High Court confirmed the judgement of the single judge and held that interest was also payable for the period 1st August, 2003 to 7th February, 2006 on the principal amount already repaid. Appeals have been filed in the Supreme Court against the said judgements of the Gauhati High Court which were admitted but no stay of the said judgements was granted.
c. Tobacco Refuse
Your Company has been receiving periodical show cause notices demanding recovery of duty on cut tobacco used in the manufacture of tobacco refuse together with interest and penalty thereon from January 2005 to October 2013, amounting to Rs.15.92 crore. All the pending appeals before CESTAT in this matter until October 2013 were allowed in favour of your Company. Against the said orders, the department preferred an appeal before the Hon'ble Supreme Court on which hearing is pending. Show cause notices for subsequent period 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 deny CENVAT credit availed on service tax paid by various service providers on the ground that the same are not in relation to the manufacture of final products. Upon adjudication, credit on most of the services were allowed in favour of your Company, however some of them are contested by the department before CESTAT. Cross appeal has to be filed by your Company before CESTAT. One of the appeals filed by your Company for the period April 2008 was heard and allowed by CESTAT by way of remand to the original authority to be decided in light of earlier judicial pronouncements.
PUBLIC INTEREST LITIGATION (PIL)
i. The two PILs filed in the Madras High Court and the Andhra Pradesh High Court against the Central Government and the cigarette manufacturers including your Company, seeking strict implementation of Cigarettes and Other Tobacco Products (Prohibition of Advertisement And Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COTP Act) and Rules are pending.
ii. Your Company has been impleaded in the petition filed in the Supreme Court by an NGO called 'Centre for Transforming India' against the Union of India along with other cigarette manufacturers, Tobacco Institute of India, Bidi Manufacturers and Bidi Manufacturers' Association seeking prohibition/ban of the manufacture, storage and sale of all forms of tobacco within the territory of India.
iii. A PIL was filed before the Uttarakhand High Court in India relating to printing of Tar–Nic contents on cigarette packets. The High Court passed an Order allowing the petition and directing ban on sale of loose cigarettes without printing health warning. The Court has also ordered ban on sale of cigarettes in the state of Uttarakhand if the union does not prescribe safe or maximum permissible limit of nicotine & tar contents in each cigarettes or label or package.
A review petition has been filed by your Company along with others against the order and is pending before the High Court of Uttarakhand.
Petitions have also been filed in other courts such as High Court of Jabalpur, National Green Tribunal, Delhi seeking ban on sale of cigarettes.
The suit for infringement and passing off filed by ITC Limited against your Company alleging that your Company had violated ITC Limited's 'Gold Flake' trade mark by using a deceptively similar get up and trade dress consisting of a combination of red and gold colors, on its 'Special' brand of cigarettes is still pending in the Hon'ble Calcutta High Court and the trial is yet to begin. ITC's application for temporary injunction was refused by the single bench of the Hon'ble Calcutta High Court. Appeal was filed by ITC and the Division Bench, without allowing the appeal, directed the hearing of the suit to be expedited. Your Company, however, has been directed to submit the sales figures of the 'Special' brand of cigarettes every month to the Court.
FINANCIAL SERVICES BUSINESS
The Company Petition filed by the Official Liquidator in the Hon'ble High Court of Andhra Pradesh seeking directions against some of the Ex–Directors of ITC Agro Tech Finance and Investments Limited (ITCATF), the Company in liquidation, into which one of the subsidiaries of your Company, viz. VST Investments Limited was amalgamated, to file a Statement of Affairs is still pending.
In terms of the Order dated 10th July, 2007 the Division Bench of the Hon'ble High Court of Andhra Pradesh had directed the Regional Director, Department of Corporate Affairs, Chennai to conduct an investigation and submit a report showing the persons who promoted ITCATF and the persons who were responsible in conducting its affairs until its winding up. A comprehensive report was prepared and filed in the Court of by the Regional Director in July 2008. Further, the Division bench, against the appeal filed by one of the Ex–Directors of ITCATF, remanded the matter to the Company Judge to decide afresh keeping in view the report submitted by the Regional Director. All the matters are still pending final adjudication.
THE CIGARETTES AND OTHER TOBACCO PRODUCTS (PROHIBITION OF ADVERTISEMENT AND REGULATION OF TRADE AND COMMERCE, PRODUCTION, SUPPLY AND DISTRIBUTION) ACT, 2003 (COTPA)
i. In view of the provisions of COTPA various restrictions such as ban on advertising in print and visual media, ban on outdoor advertising, regulation of in–store advertising, prohibition of sale of cigarettes to persons below the age of 18 years, etc. have been in force. Printing of pictorial warnings on cigarette packets, which came into effect from 31st May, 2009 were further revised with effect from 1st December, 2011. A new set of pictorial warnings were notified to come into force with effect from 1st April, 2013. In October, 2014 the Government notified a new set of pictorial warning covering 85% of the front and back principle display area of the packets with effect from 1st April, 2015. However, after extension, the same have now been implemented from 1st April, 2016.
ii. Some tobacco manufacturers have challenged various provisions of COTPA and Rules made there under in different high courts across the country. The Union Government filed transfer petitions in the Hon'ble Supreme Court seeking to transfer 31 pending writ petitions from various high courts to the Hon'ble Supreme Court. All the transfer petitions were allowed and the writ petitions have thus been moved to the Hon'ble Supreme Court, for final adjudication.
iii. Your Company had also filed a writ petition in the Hon'ble High Court of Andhra Pradesh challenging the Cigarettes and Other Tobacco Products (Packaging & Labelling) Rules, 2006 and the Amendment Rules 2008, on the grounds inter alia that they are ultra vires of COTPA and therefore the notifications issued there under (including those seeking implementation of graphic health warnings) should be quashed. The said writ petition 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 January, 2015 as part of pre–legislative consultation invited views and comments from the stakeholders and the public on the proposed Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Amendment Bill, 2015 which proposes further restrictions on the industry and more stringent penalty provisions.
The Government of Andhra Pradesh had filed a land grabbing case against your Company in 1991 in relation to a piece and parcel of vacant land which has been under possession and occupation by your Company for over four decades. By its judgement dated 28th July, 2010, the Special Court had held that your Company is not a land grabber but had given the State Government the right to initiate proceedings to recover possession of the land at some future date. Against this part of the judgement, your Company had filed a writ petition in the 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 has already been declared not to be a land grabber. The writ petition is still pending. The State Government has also filed a writ petition in the Hon'ble High Court of Andhra Pradesh seeking to set aside the said judgement of the Land Grabbing Court. An interim Order was passed restraining your Company from changing the status of the land or creating any third party interest therein. Your Company has taken all the necessary steps for 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 with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 in respect of employees of the Company, are annexed herewith as 'Annexure D' and forms part of this Report. The statement containing particulars of employees as required under Section 197 of the Act read with Rule 5(2) of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is provided in a separate annexure forming part of this report. However, in terms of Section 136 of the Act, the Report and Accounts are being sent to the Members and others entitled thereto, excluding the information on employees' particulars which is available for inspection by the Members at the Registered Office of the Company during business hours on working days of the Company up to the date of the ensuing Annual General Meeting. In case any Member is interested in obtaining a copy thereof, such Member may write to the Company Secretary of the Company.
The Nomination and Remuneration Committee of the Company has affirmed that the remuneration is as per the Remuneration Policy of the Company.
You may be pleased to note that your Company was presented the Best Management Award–2015 by the Telangana Government.
Your Directors take this opportunity to record their deep appreciation of the continuous 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 is annexed as 'Annexure E ' and forms part of this report.
The Report given by the Auditors, Messrs. Lovelock & Lewes, Chartered Accountants on the financial statement of the Company is part of the Annual Report. There has been no qualification, reservation or adverse remark or disclaimer in their Report. During the year under review, the Auditors had not reported any matter under Section 143(12) of the Companies Act, 2013 and hence, no detail is required to be disclosed under Section 134(3)(ca) of the Companies Act, 2013.
The current Statutory Auditors retire at the ensuing Annual General Meeting.
In compliance with Section 139 of the Companies Act, 2013, the Board, on the recommendation of the Audit Committee and subject to approval of the Members, has proposed appointment of Messrs. BSR & Associates LLP, Chartered Accountants as statutory auditor of your Company for a period of five years commencing from the conclusion of 85th Annual General Meeting till the conclusion of 90th Annual General Meeting subject to ratification by the Members at every Annual General Meeting. The Company has received their written consent that the appointment, if made, will be in accordance with the applicable provisions of the Act and rules framed there under.
Pursuant to the provisions of Section 204 of the Companies Act, 2013 and Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Company had appointed Dr. K.R. Chandratre, Company Secretary in Whole–time Practice, as Secretarial Auditor of the Company for the financial year 2015–16. The Secretarial Audit Report is annexed herewith as 'Annexure F' and forms part of this Annual Report.
There are no qualifications, reservations or adverse remarks in the Secretarial Audit Report.
CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO
Information in accordance with clause (m) of sub–section (3) of Section 134 of the Companies Act, 2013 read with Rule 8 of Companies (Accounts) Rules, 2014 is given in the 'Annexure G' forming part of this Report.
Your Company has stopped accepting fresh deposits for several years now. As on 31st March, 2016, your Company does not have any deposits for the purpose of its business.
Despite adverse market conditions, your Company is well placed to exploit opportunities through 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 the financial year of this Company and the date of this Report.
The Directors are grateful to all valuable stakeholders of the Company viz. customers, shareholders, dealers, vendors, banks and other business associates for their excellent support rendered during the year. The Directors also acknowledge the unstinted commitment and valued contribution of all employees of the Company.
On behalf of the Board,
RAYMOND S. NORONHA
Dated this 20th day of April, 2016.
Azamabad, Hyderabad – 500 020