Heritage Organic Limited (Heritage) has been founded by Mr. Sumit Joshi in the State of Uttarakhand. The Company has built its reputation on…

Heritage Organic Limited (Heritage) has been founded by Mr. Sumit Joshi in the State of Uttarakhand. The Company has built its reputation on traditional methods and unbending quality products. The Company is an esteemed name in the food and beverage industry, with its product ranging from aged balsamic vinegars, freshly fermented sauces and premium craft spirits. The flagship product of the company, the "Joshi Farm Fresh Balsamic Vinegar", is renowned for its composite flavour profile. The product is the result of being aged for over 25 years in a series of gradually handcrafted smaller wooden barrels. Over the past few years, under the leadership of Sumit's grandson, Roshan Joshi, Heritage Organic has gone for a rapid expansion. The company has expanded its product line and distribution network and has also appointed new dealers. The company's products are now available for online sale on all popular e-commerce sites. However, this growth has come at a cost. The once-pristine manufacturing process, rooted in manual craftsmanship, under one-roof has now been strained by a series of hasty and at times, unplanned expansions. The company's operations are now spread across three separate facilities located at three different industrial parks, spread over the entire state. Roshan has divided the entire process into three stages and has dedicated each facility for each stage. The first facility has been fermentation and aging of the product using the same traditional method. The second facility is used for bottling and packaging of the finished product in wooden barrels and the last facility is used for storage, distribution and e-marketing. This multi-facility setup has led to challenges in coordination and logistics. Roshan has formed a team of experts to conduct an internal audit of the entire process. This team in its report has revealed a number of operational inefficiencies. The audit team has emphasized on the following inefficiencies: The process of moving partially-aged products from the fermentation facility to the ageing facility, involves an outdated labour-intensive process which consumes substantial time.The Company's flagship product, balsamic vinegar barrels are often left unattended in a staging area, as the forklift operators are often engaged with other unproductive tasks.The finished bottled spirits, once they leave the bottling line, are moved to a temporary holding bay where they are waiting for quality control checks, which can sometimes be delayed due to shortage of inspectors. This waiting time is a major bottleneck.The quality control procedure involves a thorough inspection of 10% of the total produce, consumes significant time and human resource.The company's storage facility is completely disorganised, with finished goods often spending long periods in warehouse before being dispatched to the distributors.The production line for different products is also in a haphazard state due to unscheduled machine maintenance. This often leads to production delay. While highlighting these issues, the internal audit report has not quantified the actual financial impact on overall performance of the company. As the report got published, Roshan, who is a firm believer in the company's traditions, has come under tremendous pressure from the other Board members. The Board members believe that the traditional artisanal process is no longer relevant as it is not only squeezing the margins of the company but also affecting the market share which the company has previously enjoyed. Heritage Organic's finances have been strong. The company's capital structure consisted of 1.50 crore equity shares with capital and reserves and surplus of 300 crore and a net debt of 400 crore, thus, maintaining a healthy debt-equity ratio. The company has also reported the Profit Before Interest and Tax (PBIT) of 120 crore for the preceding financial year. The average tax rate is 30%. The cost of equity is projected to be 14% and while the pre-tax cost of debt is 10%. In a bid to have a global footprint, Heritage Organic, entered into a strategic partnership with a German distributor. As part of this arrangement, the German distributor will pay a certain percentage of the sales revenue as a "Brand Royalty Fee" to Heritage Organic. This royalty fee is subject to Indian tax laws. However, the tax law regarding the classification of this income is unclear and there is a potential for a prolonged dispute with the income-tax authorities. In order to avoid future tax litigations, the company's legal and tax advisors have suggested to the Board to seek an opinion from the Income-tax Department. The Company's management is also equally concerned about the potential tax liability and the uncertainty it could create for the long-term partnership with the German firm. So, as advised by the legal team and the Board, Roshan decided to file an application to the Board for Advance Rulings. Roshan wants a definitive ruling that will provide a legal shield and remove all uncertainty for their international transaction with the German company. During the financial year 2025-26, the Heritage has sponsored a sports event for farmers conducted by a Farmers Friendly Club in Nainital. The said club was established in the year 2024 for protecting and promoting the rights of farmers. The company paid 25 lakhs for sponsoring the event. Roshan has received a proposal for strategic partnership from Ms. Geeta Sharma of Shrey Industries Private Limited which is a rapidly growing company with a diverse portfolio which includes organic textiles, sustainable agriculture and eco-friendly packaging, all covered under one roof. Ms. Sharma sees an opportunity in premium food and beverage market as the next edge for expansion. In order to diversify its product line and increase the company's market share, Ms. Sharma does not see Heritage Organic as a competitor, but as a strategic partner that aligns perfectly with Shrey Industries' brand philosophy of long-term growth and sustainable legacy. Ms. Sharma has approached Roshan with a comprehensive acquisition offer. The offer is for strategic partnership wherein Roshan would retain a significant stake in the company and continue to lead the Board. To arrive at a fair price, Ms. Sharma appointed a team to conduct a meticulous valuation of the target company. As per the advisors of Shrey Industries, the industry's average P/E Ratio is 15. Heritage Organic's future maintainable profit after taxes is estimated to be 98 crores, while the future maintainable earnings per share (EPS) is estimated at 6.50. However, since Heritage Organic is an unlisted company, the analysts believe a downward adjustment of 20% is necessary to account for the additional risk of non-listing. The Board of Heritage Organic has made a detailed plan on how Shrey Industries' expertise in supply chain management and their team will help in eliminating the non-value-added activities in its operations, which would significantly increase its future cash flows. During a GST audit for the financial year 2023-24 conducted by the GST Department in February 2026 at the premises of Shrey Industries Private Limited, the GST officer has identified three instances where input tax credit (ITC) was either incorrectly claimed or not admissible: first, an IGST ITC claim of 150 lakh was made in the March 2024 GSTR-3B filed on 18th April 2024 based on invoices dated 30th March 2024 and reflected in GSTR-2B, but transport documents showed that the goods were physically received at the warehouse only on 4th April 2024, leading the Superintendent to allege that the credit was claimed prematurely as the goods were not received during the March 2024 tax period; second, ITC of 2.70 lakh was claimed in November 2023 on outdoor catering services availed for a marketing event organized for existing and prospective dealers and third, in October 2023, the company gifted home appliances worth - 15,000 each to its 200 employees and - 5,000 each to 500 workers, with a total market value of 55 lakh (excluding GST) and subject to GST at 18% (9% CGST and 9% SGST), prompting the Superintendent to issue a demand for tax, interest and penalties. To address the dispute, the Chief Accountant seeks advice from CA. Gaurav, an indirect tax specialist, who upon reviewing the company's Electronic Credit Ledger observed that even after filing the March 2024 GSTR-3B, the company had a remaining ITC balance of 120 lakh, comprising 60 lakh in CGST and 60 lakh in SGST. The management of Heritage is also planning to enter into a new venture of manufacturing electric motors for EV two-wheelers as they feel that with the improved roads, the demand for EV two-wheelers is increasing day-by-day. To assess the financial feasibility of the venture, the Board tasked the Costing department with collecting and analysing relevant data on market prices and production costs. Based on market research, the department found that the expected selling price per unit would be - 7,500, with a direct material cost of 6,200 per unit, direct labour cost of 240 per hour and variable overheads of 160 per hour. Labour efficiency is projected to improve as production increases due to a 90% learning curve effect (learning index = -0.1520). The first batch of 100 units is estimated to require 250 labour hours, with the learning effect expected to continue until 1,000 units (10 batches) have been produced. Beyond this level, the learning effect will plateau and each subsequent batch will require same labour time as the 10th batch. The batch size will remain constant at 100 units. The company is in negotiation with EV two-wheeler manufacturer and is assured of order for 5,000 units at a price of 7,200 per unit for the year 2026-27. It is anticipated that 5,000 electric motors will be produced and sold during this period. (Note 10 -0.1520 = 0.705 and 9 -0.1520 = 0.716) Heritage Organic is proposing buy-back of its shares. The company would buy 10 lakh equity shares for 150 per share. All the shares were issued at face value of 10 each about 16 years ago. For making this offer, the company wants to seek the opinion of its tax counsel about the taxability of buy back for shareholders and the obligations of the company.