ITAT Holds Excise Refund Taxable for MAT; Sustains Scientific Allocation but Upholds Freebies Disallowance

Eris Lifesciences Ltd., a pharmaceutical manufacturer, faced several additions for AY 2018-19 after the Assessing Officer reworked its employee cost allocations to its Guwahati Unit, which claimed a deduction under Section 80-IE. The AO rejected the company’s division-wise allocation method and substituted his own unit-wise sales ratio, resulting in an addition of Rs. 9.35 crore.

He also disallowed 7.5% of channel partner, retail promotion and conference expenses under Section 37(1), alleging that a portion amounted to prohibited “freebies” to doctors under MCI Regulations. The AO also refused to exclude an excise refund of Rs. 19.66 crore from book profits while computing MAT under Section 115JB, holding it was income under Section 2(24)(xviii) after the 2015 amendment. The CIT(A) upheld the Section 37(1) disallowance. Both sides appealed before the Tribunal.

Main Issue: Whether the expense allocation, excise duty refund treatment under MAT, and Section 37(1) disallowance were correctly adjudicated, and whether the assessee was entitled to indexation adjustment while computing book profits under Section 115JB.

ITAT Held: The ITAT upheld the CIT(A)’s deletion of the Rs. 9.35 crore allocation-related addition, observing that the assessee’s division-based method was scientific, rational and aligned with CAS-7 standards. It held that the AO could not substitute this method with a simplistic sales-based allocation without demonstrating defects in the assessee’s system. The Tribunal agreed with the CIT(A) that expenses linked to providing benefits to medical practitioners remained hit by the Supreme Court’s ruling in Apex Laboratories, and hence the disallowance was sustained.

The Tribunal explained that post-Finance Act 2015, Section 2(24)(xviii) expressly treats government assistance in the form of duty refunds or concessions as income unless covered by narrow exceptions, which the assessee’s refund did not satisfy. The Tribunal, however, accepted the assessee’s plea on indexation for capital gains in MAT computation and remanded the issue back to the AO for verification.

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