The ITAT held that cost-to-cost salary reimbursement for seconded employees without markup does not constitute fees for technical services (FTS) and is not taxable in India.
ITAT on Cost-to-Cost Reimbursement of Expatriate Salaries
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) has held that reimbursement of salaries for seconded expatriate employees on a pure cost-to-cost basis, without any markup, does not amount to fees for technical services (FTS) under the Income Tax Act, 1961. The decision clarifies the tax treatment of cross-border cost reimbursements in multinational corporate structures.
The tribunal emphasized that the absence of profit element or additional charges in the reimbursement was determinative. Since the recipient entity merely recovers actual costs incurred, there is no service fee or technical remuneration involved. The ITAT relied on judicial precedents holding that FTS requires an independent service contract with value addition, which was absent in this case.
"Where the reimbursement is strictly cost-to-cost and no profit or margin is derived, it cannot be construed as FTS chargeable to tax in India."
This ruling provides clarity for multinational enterprises engaging in intra-group employee secondments. Taxpayers must maintain robust documentation demonstrating the absence of markup and the bona fide nature of cost recovery. The decision may influence transfer pricing policies and withholding tax obligations under Section 195 of the Income Tax Act.
Citations
- Income Tax Act, 1961, Section 9(1)(vii)
