CAG Blames I-T Dept for Rs 1,348 Cr Tax Loss in Pharma Sector

New Delhi
CAG Blames I-T Dept for Rs 1,348 Cr Tax Loss in Pharma Sector

Coming down heavily on the I-T Department, CAG has said non-compliance of procedures for giving incentives to pharmaceutical firms, including Ranbaxy, Dr Reddy's and Piramal, resulted Rs 1,348.44 crore loss to the exchequer.

The Comptroller and Auditor General (CAG) in its report on the pharmaceuticals sector said the I-T Department allowed firms to claim benefits on R&D expenses without verification, while assessing officers (AOs) allowed expenses on freebies and gifts to doctors despite such a practise being illegal.

The public accounts auditor in the assessment report completed during the period from 2010-11 to 2013-14 also lashed out at the I-T Department for not maintaining proper data on incentives given to the sector.

The report, which contains 246 cases, where the CAG pointed out "deficiency in the system or in the compliance with the laid down provisions involving total tax effect of Rs 1,348.44 crore".

Citing examples of how due procedures were not followed, the CAG said Ranbaxy Laboratories had claimed weighted deduction on R&D expenditure of Rs 670.8 crore and Rs 645.5 crore for assessment years 2008-09 and 2009-10 respectively.

"The claim deduction had been allowed without the confirmation of approved expenditure," CAG said, adding that it "resulted in under assessment of income to the same extent involving tax effect of Rs 228 crore and Rs 193 crore" for the two assessment years respectively.

In case of Piramal Life Science, CAG said, "The assessee claimed and the tax department allowed R&D expenditure of Rs 344.55 crore to the assessee company without verification of documents and detailed scrutiny."

The auditor said the company's name did not appear in the annual report of Department of Scientific and Industrial Research (DSIR) reflecting approved R&D expenditure of assessees, thereby involving a tax effect of Rs 103.37 crore.

The CAG said assessing officer had allowed Dr Reddy's to count as expense Rs 15.43 crore paid as penalty to NPPA, which was not allowable.

The tax department initially objected to the observation saying it wasn't a penalty amount but recovery of overcharged amount, CAG said, adding that "however subsequently remedial action was completed in which the entire claim was disallowed stating that the same was infraction of law".

"This involved under assessment of to the same extent with short levy of tax of Rs 8.10 crore," it said.

On the practice of freebies and gifts to doctors, CAG said AOs allowed expenditure on gifts, travel facilities, hospitality, cash or monetary grant despite the practice being prohibited by Medical Council of India, CBDT/judicial pronouncements.

"We noticed 21 cases in five states in which the AO had allowed expenses which were in nature of freebies given to doctors involving tax effect of Rs 45.43 crore," CAG said in its report.

Citing the example of IPCA Laboratories, CAG said the company had incurred expenditure of Rs 32.91 crore on "Heart Touching Celebration, sponsorship of doctors and corporate/ brand recall items".

"This resulted in under assessment of income to the same extent involving tax effect of Rs 11.19 crore," CAG said.

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