Delhi ITAT rules on tax deduction for cost reimbursement to non-resident head office

The Delhi ITAT recently ruled in favor of an assessee, stating that the reimbursement of deputed employees’ costs to a non-resident head office would not be subjected to tax deduction at source under Section 195 in the absence of a profit element. The assessee, a project office of TPF Getinsa Euroestudios SL Spain (Head Office), was awarded engineering consultancy contracts by National Highway Authority of India (NHAI). Accordingly, the project office entered into a management support services agreement with its head office to avail the services of employees for execution of the contract, and made a payment of Rs.2.18 Cr towards the services availed from head office employees.

The revenue proposed to disallow the payment of Rs.2.18 Cr due to non-deduction of tax deducted at source. The DRP dismissed the assessee’s objections and the revenue disallowed the payment of Rs.2.18 Cr made to the head office. However, the ITAT allowed the assessee’s appeal by referring to the management service agreement and contending that the head office provided services either offshore or through deputation of employees for providing management/engineering services relevant for execution of the contract awarded by NHAI. Against this, reimbursement on the basis of actual cost was sought by the head office.

The ITAT observed that on perusal of the clause of the management support agreement, it is evident that the head office invoices the internal costs as well as reimbursable costs (i.e., the salary costs of the expats deployed in India) on a cost-to-cost basis without any profit element. The head office incurred the cost on behalf of the assessee in terms of salary of expatriates for assisting the assessee in executing the contract awarded by NHAI. The assessee had only reimbursed the actual cost based on the time spent and time cost of assisting employees. On perusal of invoices, it is ample clear that the head office did not charge markup, and accordingly, there is no profit element in the costs stipulated in the invoices.

The ITAT relied on the Karnataka High Court ruling in Flipkart Internet (P) Ltd v DCIT (2022) 139 595 (Karn.) wherein it was held that the assessee would be eligible for a Nil deduction certificate under Section 195(2) with respect to payment of salaries of deputed expatriate employees which were in nature of ‘pure reimbursement’. The ITAT also relied on the Supreme Court ruling in DIT v. A.P. Moller Maersk A S 293 CTR 1 (SC) wherein it was held that reimbursement of cost cannot be taxable in India in absence of a profit element.

The ITAT observed that in absence of a profit-related element, a receipt cannot be classified as income in the hands of the recipient. Accordingly, reimbursement cannot be treated as income and cannot be subject to tax deduction at source or income tax. The Income tax Act seeks to levy income tax in respect of ‘income’ of every person, and the term ‘income’ has been exhaustively defined to include gains, profits or value addition.

In conclusion, the Delhi ITAT’s recent ruling highlights that reimbursement of cost to a non-resident head office in the absence of a profit element cannot be classified as income and is not subject to tax deduction at source or income tax. This ruling provides clarity on the interpretation of Section 195 of the Income Tax Act and serves as a valuable precedent for future cases.

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