ITAT upholds Sun Pharma Labs Ltd.'s Deduction for Consultancy fees paid to McKinsey & Company, Classifying it as Revenue Expenditure [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the decision of the Commissioner of Income Tax(Appeals)[CIT(A)] regarding Sun Pharma Laboratories Ltd.'s deduction for consultancy fees paid to McKinsey & Company, classifying these expenditures as revenue in nature.

The revenue-appellant contested the CIT(A) order dated 28.02.2019 regarding the assessment for Assessment Year (AY) 2015-16 under Section 143(3) of the Act.

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Sun Pharma Laboratories Ltd., the respondent-assessee, was involved in a dispute over the disallowance of management consultancy charges paid to McKinsey & Company.

The Assessing Officer (AO) had disallowed the consultancy fees on two main grounds: first, that the payments were made for the benefit of the parent company, Sun Pharma Industries Limited (SPIL), rather than for the assessee itself; and second, that the consultancy fees would provide benefits to the assessee for an indefinite period, thereby classifying them as capital expenditures not allowable under Section 37(1) of the Act.

In response, the assessee argued that prior to the merger, it had been responsible for the domestic formulation business while SPIL focused on foreign markets. Following the merger, both entities operated in the domestic market, necessitating the engagement of McKinsey & Company to streamline operations and realize synergy benefits. The consultancy services were aimed at optimizing business functions, eliminating redundancies, and improving operational efficiency.

The AO acknowledged the genuineness of the services provided by McKinsey but asserted that the benefits derived from the consultancy fees were capital in nature. The assessee, however, maintained that these expenses were incurred wholly and exclusively for business purposes, qualifying as revenue expenditures.

The CIT(A) observed that the consultancy services were intended to optimize the functioning of the assessee’s business and did not guarantee any enduring benefits. He emphasized that revenue expenditures are operational in nature and intended for the regular functioning of the business, distinguishing them from capital expenditures that imply lasting benefits.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

After reviewing various judicial precedents, the CIT(A) concluded that all conditions for claiming a deduction under Section 37(1) were satisfied and allowed the expenditure incurred for the consultancy fees as a business deduction. Consequently, he directed the deletion of the addition made by the AO concerning the consultancy fees amounting to Rs. 16,55,52,260.

The revenue-appellant, unable to point out substantial errors in the CIT(A)’s findings, ultimately supported the decision, relying on various judgments that aligned with their argument regarding the capital nature of the consultancy fees.

The two member bench comprising T.R.Senthil Kumar(Judicial Member) and Annapurna Gupta(Accountant Member) after thorough examination, upheld the CIT(A)’s order, affirming that the consultancy charges were revenue in nature and allowable under Section 37(1) of the Act.

In conclusion, the revenue appeal was dismissed.

To Read the full text of the Order CLICK HERE

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