Investigation on HLL tax isue to begin soon

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Investigation on HLL tax isue to begin soon

Barely a few weeks after a survey on FMCG leader HLL by the IT department the company may need to brace itself up for a major tax investigation. HLL could face a disallowance of almost Rs 3,000 crore of expenditure if the IT department rules against it.

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FMCG major Hindustan Lever could soon find itself in a major tax soup. The TDS wing of the Income Tax Department has alleged that HLL failed to deduct over Rs 58 crore in tax over payment of almost Rs 3,000 crore made to third party contractors.

The matter pertains to manufacture of soaps, which HLL has been outsourcing to third party manufacturers. The TDS wing of the IT department claims that HLL should have deducted 2% tax at source while making payment to third party manufacturers as it is a works contract.

On the other hand, HLL is believed to have taken the stand that no tax is deductible since it is an outright sale and re-purchase from manufacturers. Tax experts say HLL might have a strong case.

Tax Consultant, Jitendra Sanghavi says, "Judicial decisions by Bombay High Court and Delhi ITAT hold that it is not a works contract and hence no TDS is deductible."

The case involves two years - that is fiscal years 2004-05 and 2005-06 and assessments of both the years are yet to commence. If the IT department rules against HLL, then as per the income tax act, the Rs 3000 crore payment will not be allowed as a business expenditure.

But the good news for HLL is that it can claim the Rs 3000 crore as expenditure in the year in which it deducts TDS. Even then, HLL could soon be making several rounds of the tax department.