Philip Morris International Inc has for years paid manufacturing costs to its Indian partner to make its Marlboro cigarettes, circumventing a nine-year-old government ban on foreign direct investment in the industry, internal company documents reviewed by Reuters showed.

The Indian government in 2010 prohibited FDI in cigarette manufacturing, saying the measure would enhance its efforts to curb smoking.

Restricting foreign investment leaves cigarette manufacturing largely in the hands of domestic players, and is supposed to prevent any foreign-funded expansion. A year after the government’s decision, Japan Tobacco exited India, citing an “unsustainable business model”.

Philip Morris, though, stayed in India and used another route, according to company documents dated between May 2009 and January 2018. A year before the FDI ban, it struck an exclusive deal with India’s Godfrey Phillips to locally manufacture the world-famous Marlboro cigarettes.

Ever since then, Godfrey has publicly acted as a contract manufacturer of Marlboro cigarettes in India, while Philip Morris’s majority-owned local unit acts as a wholesale trading company and promotes the brand.

But dozens of internal company documents — including invoice bills, legal agreements, e-mails and accounting statements — show Philip Morris has for years indirectly paid costs related to Marlboro cigarette manufacturing in India.

Some former Indian enforcement officials said the practice of indirectly paying for manufacturing-related costs violates regulatory rules. However, some lawyers such as Pratibha Jain, a partner at Nishith Desai Associates, disagreed, pointing out that the federal rules did not explicitly prohibit such payments.

Philip Morris’ director for corporate affairs in India, R Venkatesh, in an e-mail, said the company's “business arrangements with Godfrey Phillips India comply with Indian Foreign Direct Investment Rules”. He did not elaborate.

Six invoices issued by Godfrey showed billing of ₹4.55 crore ($644,200) to Philip Morris between December 2013 and January 2018 for manufacturing-related charges. Philip Morris paid for items ranging from large cigarette-making machines to costs of smaller equipment such as barcode scanners and printers deployed in Godfrey’s factories.

One invoice from January 2018 sent from Godfrey to Philip Morris showed the Indian company had spent ₹20.6 crore ($3 million) on capital expenditure for Marlboro-related manufacturing activities since 2009, though it was not clear how much of that was paid by Philip Morris.

Godfrey Phillips’ head of corporate affairs, Harmanjit Singh, said in an email that all the commercial arrangements ”are in complete compliance with the extant regulations governing the Indian FDI and other applicable laws, and, incidentally, all transactions are in rupees.

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