No TDS under Section 195 on ‘cost reimbursement’ to non-resident HO for employee deputation in absence of profit element

The Delhi Income Tax Appellate Tribunal (ITAT) has allowed the appeal of TPF Getinsa Euroestudios SL Spain’s (Head Office) project office in India, stating that the reimbursement of deputed employees’ costs to a non-resident head office on the basis of time spent on an engineering consultancy contract shall not be subjected to tax deduction at source under Section 195 of the Income Tax Act. The reimbursement was made in the absence of any profit element. The case involved a management support services agreement between the project office and the Head Office for the execution of engineering consultancy contracts awarded by the National Highway Authority of India (NHAI). The project office made a payment of Rs. 2.18 Cr towards the services availed from Head Office employees, which the Revenue proposed to disallow due to non-deduction of tax deducted at source.

The Dispute Resolution Panel (DRP) considered the additional evidence filed by the Assessee and the remand report of Revenue and dismissed the Assessee’s objections. As a result, the Revenue disallowed the payment made to the Head Office. However, the ITAT referred to the management service agreement and contended that the Head Office provided services offshore or through deputation of employees for providing management/engineering services relevant for the execution of the contract awarded by NHAI. The reimbursement was sought by the Head Office on the basis of the actual cost incurred. The ITAT observed that on perusal of the clause of the management support agreement, it was evident that the Head Office invoices the internal costs as well as reimbursable costs on a cost to cost basis without any profit element.

The ITAT observed that the Head Office had incurred the cost on behalf of the Assessee in terms of the 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 was ample clear that the Head Office did not charge a markup, and accordingly, there was no profit element in the costs stipulated in the invoices.

The ITAT relied on the definition of ‘income’ under the Income Tax Act, which exhaustively defines it to include gains, profits or value addition. However, in the 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 ITAT relied on the Karnataka High Court ruling in Flipkart Internet (P) Ltd v DCIT and the Supreme Court ruling in DIT v. A.P. Moller Maersk A S to support its decision.

In conclusion, the ITAT allowed the appeal of the project office and held that the reimbursement of deputed employees’ costs to a non-resident head office on the basis of time spent on an engineering consultancy contract shall not be subjected to tax deduction at source under Section 195 of the Income Tax Act in the absence of any profit element.

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