Assessee was not liable to withhold tax at source u/s 40(a)(i) on cost-to-cost reimbursement made to parent company
In a recent judgment, ITAT has held that the assessee was not liable to withhold tax at source u/s 40(a)(i) on cost-to-cost reimbursement made to parent non-resident company towards IT cost & common software facility, salary & travel reimbursement as payments made were in nature of reimbursement with no profit element.
ABCAUS Case Law Citation:
5173 (2026) (06) abacus.in ITAT
Important Case Laws relied upon by Parties:
Director of Income-tax (IT)-I v. A.P. Moller Maersk A S
CIT v. Kotak Securities Ltd.
Advics Co. Ltd.
Toshiba Energy System & Solutions Corporation
The appellant assessee company was engaged in business of trading and manufacturing of pollution of control equipment’s, environment analyzer, medical instruments, and provision of marketing support services in relation to engineering, installation, commissioning, and maintenance.
The return of the assessee was selected for complete scrutiny under CASS. The AO made a reference u/s 92CA(3) of the Income Tax Act, 1961 (the Act) to the Transfer Pricing Officer (“TPO”). The TPO vide order made an adjustment to the income of appellant. The AO passed draft assessment order proposing a corporate tax adjustment on account of non-deduction of TDS and reimbursement of expenses in addition to transfer pricing adjustment.
Against the draft assessment order, the assessee filed objection before Dispute Resolution Penal (“DRP”) which disposed of the objections. Transfer Pricing adjustment was upheld with respect to corporate tax addition. Specifically, travel reimbursement.
As a result, the AO passed final assessment order making TP adjustment and corporate tax adjustments. Aggrieved, the assessee preferred an appeal before the ITAT.
The Tribunal observed that during the captioned assessment year, the assessee has made certain cost-to-cost reimbursements to its group affiliates on account of reimbursement for IT cost & software support expenses, reimbursement for salary expenses, reimbursement for travel expenses. The same issue was already allowed in favour of appellant in preceding and subsequent years by the AO.
The Tribunal noted that the payment towards IT infrastructure and software is a cost-to-cost reimbursement of expenses to its parent company towards IT infrastructure equipment’s and software related expenses incurred on behalf of all of its group companies. This cost was primarily related to parent server, network etc. and other business-related software used for backup, centralizing the data management process and disaster management.
The Tribunal also observed that it was evident from the invoices that actual cost of the IT infrastructure Cost & Software was allocated to various group affiliates (including the Appellant) without any mark-up based on the mechanism agreed in the agreement (for e.g. number of users, license numbers etc). The cost was being charged on a per-user basis which itself substantiated that the allocation had been done on basis of actual expenditure incurred by dividing it with total number of users (employees) in the entire group (overseas entities worldwide & India). Therefore, there existed a direct correlation between the actual expenses incurred by the Appellant and the “reimbursement” made. Accordingly, by no stretch of imagination, it can be held that the aforesaid reimbursement was in nature of fees for technical services under Article 12(4) of India Japan DTAA since there are no technical services that are being rendered.
It was held by the Tribunal that the payments being made to a non-resident entity were in the nature of a cost-to-cost reimbursement with no profit element embedded, and accordingly, there would be no sum chargeable to tax under the Act. Therefore, there was no liability on the Appellant to withhold tax at source under section 40(a)(i) of the Act.
The Tribunal further noted that the assessee had submitted that the Appellant needed some employees for facilitating its operation in India. The employees seconded to India are recruited by the Appellant in departments like sales department, accounting department, etc. They were involved in normal day-to-day working of the Appellant and do not possess any specialized technical skills, and it cannot be alleged that the employees were providing technical services on behalf of related entity.
The Tribunal observed that the part of the salary to these employees was paid to them in India and the other part was paid to them overseas by Related parties for administrative convenience. Subsequently, such other part paid was recharged by the Appellant without any mark-up. Both the parts of the salaries were taken in account by the Appellant for the purpose of tax deduction at source and there was no amount of income which remains untaxed in India.
The Tribunal held that since taxes on the salaries of seconded employees had been duly deducted and deposited under Section 192 of the Act as Income under the head “salaries” and thus, any reimbursement of such payment, cannot be taxed again under Section 195 of the Act. The same has been held in plethora of judicial precedents. Mere reimbursement of salary by the Indian Company towards the salary cost does not give rise to any income in the hands of the recipient and thus is not liable to tax in India.
Regarding the travel expenses, the appellant submitted that to conduct its business efficiently and effectively, the Appellant carrried out various conferences, trainings, meetings, etc. abroad. The employees of appellant travel abroad to attend these meetings/conferences. The expenses towards travel of employees was incurred by related parties and subsequently, the costs incurred by the related parties of the Appellant in respect of the employees of the Appellant is repaid to them on cost-to-cost basis Expenses are incurred by related entities only for the sake of logistical convenience since the related parties was in a better position to undertake the arrangements. That travel reimbursement was a mere repayment of what has already been spent and was not a reward or compensation for services rendered
It was also submitted that as per CBDT Circular 5/2002 there is no requirement to withhold taxes on payments done towards hotel charges and purchase of tickets. The expense towards travel of employees was incurred by related parties only due to logistical convenience since the related parties was in a better position to undertake the arrangements.
The Tribunal held that the assessee had made payments towards IT infrastructure and cost software is a cost-to-cost reimbursement of expenses to its parent company, the purpose was to meet the requirements of global business by maintaining a uniformed/ common group information system for the entire group. Further, the assessee had made salary reimbursement to qua employees for facilitating its operation in India. The employees seconded to India are recruited by the appellant in departments like sales department, accounting department, etc. They are normal and do not possess any specialized technical skills, and cannot be alleged that the employees were providing technical services on behalf of related entity. Also, payments for travelling were made to non-resident entity are in nature of reimbursement with no profit element and there would be no some chargeable to tax need Act. So, there was no liability on assessee to withhold tax at source u/s 40(a)(i) of the Act.
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