Reimbursement of cost from Indian group concern for providing business support not taxable as FTS in India

Background and Facts

  • Assessee, a Denmark based company, was engaged in business of shipping and logistics.
  • During relevant year assessee received reimbursement of cost from its Indian group concern towards business support charges which was claimed as not liable to tax due to absence of assessee’s PE in India.
  • Assessing Officer (AO) taking a view that support services were ancillary and subsidiary to providing access to IT Network Systems of goods, brought amount in question to tax as ‘FTS’ under article 13 of India-Denmark DTAA
  • Aggrieved by the decision of AO/DRP, assessee preferred an appeal before Income-tax appellate tribunal, Mumbai.

Assessee contentions before ITAT

  • Assessee contended that it acts as the central coordinator for all group entities and procures business support services from various service providers as needed by group entities and thereafter, recovers the cost of procurement of these services from these group entities as a reimbursement costs without any mark-up.
  • These reimbursement costs were based on allocation keys for which assessee submitted Management service agreement and Independent auditor report.
  • Therefore, all receipts in relation to business support charges being in the nature of reimbursement of cost, devoid of any income element/profit embedded into it, ought not to be taxable as fees for technical services/royalty under explanation 2 to Section 9(1)(vi) of Income Tax Act (the Act) or DTAA with Denmark.

Tax Authority contentions before ITAT

  • Tax Authority contented that the reimbursement is towards IT Network Systems and support services and no bifurcation is available in respect of payment towards each of these items for which a composite bill is being raised.
  • Further, stating that the support services are ancillary and subsidiary to providing access to IT Network Systems of the group and payment towards license to the software is taxable as royalty and FTS.
  • Therefore, amount received by the assessee as business support charges should be treated as royalty and FTS under the IT Act as well as under Article 13 of the DTAA between India and Denmark and the same should be taxable.

    ITAT ruling and Conclusion

    • In the present case, services rendered by the appellant are in the nature of coordinating services whereby various costs incurred are pooled together and recovered as reimbursement costs on the basis of various allocation keys.
    • The Tribunal relied on the decision of the honourable Supreme Court in the case of P. Moller Maersk AS [2017] 392 ITR 186 (SC) and Kotak Securities Ltd. [2016] 383 ITR 1 (SC) where it was held that reimbursement of cost cannot be taxable in India being devoid of any profit element/income.
    • Accordingly, tribunal held that receipt of business support charge is not taxable as fees for technical services/royalty under the Act or DTAA with Denmark.


    The issue with respect to taxabilty of payments made towards reimbursement of expenditure has been a subject matter of litigation. However, through varoius judgments, a fair conclusion can be drawn that pure reimbursement of costs where element of profit has not been embedded, would not trigger the taxability.

     Source: * Damco International v. DCIT (International taxation) A/S [2020] 118 37 (Mumbai – Trib.) (in Favour of Assessee)              

                     -Shashank Sharma, Audit Associate, ShineWing India