Sales, Use and International Tax Activity Update - September 2009

India Issues Landmark Ruling on Input Tax Recoverability

The case involved a contract manufacturing model where the Taxpayer manufactured a soft drink concentrate which was sold to bottling companies who in turn manufactured a beverage that was sold through distributors.

The Taxpayer holds the brand name of the beverage and handles the advertising and sales promotion of the beverage. At issue is whether the Taxpayer, who is the manufacturer of the concentrate, is entitled to input tax recovery for the tax paid on advertising expense when the beverage sold is actually manufactured by the bottling company.

The High Court of Bombay ruled that the Taxpayer is entitled to input tax recovery of advertising expense and sales promotion activities for a product that is manufactured by a third party. The Court took a close look at the meaning of the term “input services” and also noted that the advertising expense is included in the price of the final product that is subject to excise duty.

The ruling may be challenged by Revenue based on the concern that it may lead to a situation where all services received by a business, as a business expense, would qualify for input tax credit.

---

Subscribe to CyberTax News and receive the latest indirect tax news, including rate changes, rule updates, compliance issues, and more, delivered directly to your email.

Email Address

e.