Drug and cosmetics CMOs to benefit from Coca-Cola’s India win

By Gareth Macdonald

- Last updated on GMT

Pharmaceutical and cosmetics contract manufacturing organisations (CMOs) in India can now claim tax credit on their advertising spend following a recent appeal court victory for US beverage giant Coca-Cola.

Late last week, the Bombay High Court ruled that “advertising and marketing procured by [Coca-Cola is]… covered by the definition of the words ‘input services’ as defined in Rule 2(1)of the CENVAT Credit Rules, 2004​.”

Justices Rebello and Bhatia said that since input service credit “must be allowed on expenditure incurred by the assessee [that] form a part of the assessable value of the final product,”​ Coca-Cola is entitled to claim it as a rebate against excise duty it incurs by supplying drink concentrate to contract manufacturers.

For pharmaceutical and cosmetics CMOs the implications could be huge given that some spend as much as 12 per cent of their annual revenues on marketing and promotion of products they make on their clients behalf.

Economic Laws Practice’s Vikram Nankani, who represented Coca-Cola during the appeal, was clear about the impact on India’s booming contract manufacturing sector in an interview with the Business Standard​.

He said that: "All [contract] manufacturers will be eligible to avail of credit on the service tax paid on input services that are directly or indirectly related to the business of the manufacturer or the brand owner​."

KPMG’s Prateel Jain agreed, telling the paper that the decision could "see a company's bottom-line improve by 10.3 per cent, equivalent to the service tax, since this will reduce the input costs of the company and improve its cash flow​."

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