Drug firms come under scanner for I-T claims

Drug firms come under scanner for I-T claims
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First Published: Fri, Sep 11 2009. 11 46 PM IST
Updated: Fri, Sep 11 2009. 11 46 PM IST
Mumbai: The income tax (I-T) department is investigating alleged misrepresentation by a number of Indian and foreign drug makers to claim a tax deduction granted for companies that undertake production contracts for them.
The fresh action comes less than a month after the department took several drug makers to court on charges of not applying tax deduction at source on payments to contract manufacturers.
In the latest case of alleged misrepresentation, the I-T department has moved the Bombay high court against Okasa Pharmaceuticals Pvt. Ltd, one of the domestic subsidiaries of leading generic drug maker Cipla Ltd.
The department has charged Okasa with claiming I-T deduction worth crores of rupees on drugs that were actually manufactured by at least a dozen contract suppliers. A lawyer familiar with the case said the department moved the court in August. He did not want to be named.
A person familiar with the development declined to put a number to the deducted amount, saying the numbers had not been tallied, yet.
A senior executive of Cipla, when contacted, declined to comment as he is not authorized to talk on behalf of Okasa. Officials at Okasa could not be reached immediately for comment.
According to the lawyer, who represents the department, Okasa has been claiming deductions under section 80IA on products manufactured by contract suppliers since 1997. These contract suppliers are not independently eligible for the deductions.
Under the 801A provision in the tax code, an undertaking or enterprise engaged in infrastructure development is entitled to claim 100% tax holiday on its profit for 10 consecutive assessment years beginning in the year when the firm develops and begins to operate any infrastructure facility, starts providing telecommunications services, generates power, develops an industrial park, or operates a special economic zone.
The pharmaceutical industry has a large contract-manufacturing base; more than one-third of the total 15,000 active drug units are pure contract suppliers in India.
Of these, 90% are small-scale manufacturers that enjoy various tax incentives through governmental schemes to incentivize small-scale industries.
While top drug makers typically focus on the marketing side, most leading domestic drug makers have their own manufacturing plants as well.
According to the department, Okasa had in 2000-01 outsourced its work to 17 other companies under loan and licensing manufacturing.
Of these, 14 were not entitled to the deduction. Hence, the company claimed deduction on the products manufactured by these 14 firms along with its own manufacturing.
But the company argues that since it provides the specification for products to the manufacturer, it can claim the deduction, said the same lawyer cited above.
The I-T department’s stance is that the firm cannot claim deduction on the products manufactured by others, something that has been proved through investigation. “There are many more cases of similar nature that the department is probing now and it will move the courts for recovery of unpaid taxes,” the department’s lawyer said.
khushboo.n@livemint.com
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First Published: Fri, Sep 11 2009. 11 46 PM IST