ITAT holds That Cost Reimbursement to Overseas Group Entities Cannot be Treated as FTS And No TDS Required

The Income Tax Appellate Tribunal (ITAT) Delhi ruled that where reimbursement payments do not contain any profit element, they are not chargeable to tax in India and consequently no tax was required to be deducted under Section 195 of the Income Tax Act, 1961.

Horiba India Private Limited is engaged in the business of manufacturing and trading pollution control equipment, environmental analyzers, and medical instruments and providing marketing support services. The company filed its return declaring an income of Rs. 25.83 crore for AY 2020-21. During assessment proceedings under Sections 143(3), 144B and 144C(13) of the Income Tax Act, the AO made corporate tax additions amounting to Rs. 1.75 crore and also made a transfer pricing adjustment of Rs. 1.36 lakh.

The additions were mainly related to reimbursement of IT infrastructure and software costs amounting to Rs. 42.14 lakh, salary reimbursement of Rs. 1.18 crore and travel expense reimbursement of Rs. 14.66 lakh made to overseas group entities. The AO treated these payments as Fees for Technical Services and disallowed the same under Section 40(a)(i) on the ground that tax had not been deducted under Section 195.

Aggrieved by the final assessment order, the assessee approached the Tribunal.

The Tribunal observed that the amounts paid towards IT infrastructure and software expenses were just the reimbursements of actual expenditure by the company on behalf of group entities. Such payments represented sharing of a common facility and did not involve any technical services within the meaning of Article 12(4) of the India-Japan DTAA.

With respect to salary reimbursement, the Tribunal noted that the employees were working in the ordinary course of business in departments such as sales and accounts and did not provide any specialized technical services. Taxes had already been deducted under Section 192 on the salary payments and the employees had offered such income to tax. Therefore, reimbursement of salary cost could not be called FTS under Section 195.

Regarding travel expenses, the Tribunal held that reimbursement of travel-related expenses done by overseas entities was only a repayment of actual expenditures and did not amount to any technical services. Since there was no profit element in these payments, no sum was chargeable to tax in India.

Allowing the appeal, the Tribunal also deleted the transfer pricing adjustment of Rs. 136,723 relating to interest on receivables and allowed the appeal of the assessee.