New Delhi: The TDS wing of the income tax department has served a demand notice of about Rs 2 crore to pharmaceutical company Novartis for not deducting its tax at source.
Similar notices have also been sent to other big pharmaceutical firms, which have been outsourcing their manufacturing activities to third-party manufacturers.
The tax department claims that the pharmaceutical companies should have cut tax at source before making payments to these contractors.
The tax department's aggressive stand on a sensitive issue like tax deduction at source is likely to throw up a maze of litigations and judicial precedents.
The companies have taken a stand on the issue, saying that no tax is deductible, since it is an outright sale and repurchase from third-party manufacturers, a view that a Bombay High Court decision had affirmed earlier in a statement.
The companies are worried that the money paid to contract manufacturers will be disallowed as business expenditure and would therefore attract 30% corporate tax which will run into several hundred crores of rupees.
Whereas Novartis is concerned, the figure is likely to be between Rs 60 to 80 crores.
Tax experts said the department's action on this disallowance is unwarranted.
The matter is likely to end up in lengthy litigation, as the stakes are too high for both the tax department as well as the pharma companies.
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