India: Expense reimbursements; transfer pricing study | KPMG | BE

India: Expense reimbursements; transfer pricing study showed no profit element

India: Expense reimbursements; transfer pricing study

The Mumbai Bench of the Income-tax Appellate Tribunal held that amounts received by the taxpayer as reimbursements of training-related travel expenses, group health insurance, and other incidental expenses under a technical service agreement were not taxable as fees for technical services. Relying in part on the transfer pricing study and transfer pricing order, the tribunal found that there was no element of profit embedded in the expense reimbursements, and thus, the reimbursements were not taxable.

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In other words, the tribunal concluded that the pure reimbursement of costs without an element of profit was not taxable.

The case is: Gemological Institute International Inc. v. DCIT (ITA 4659/Mum/2014 and ITA 385/Mum/2016)

Summary

The taxpayer (a U.S. incorporated, non-resident company) agreed to a training and technical service agreement with a group company in India. The taxpayer was to train the employees of the India group company and to provide technical services with respect to implementing certain processes and procedures.

On its return, the taxpayer did not report the amount of the expense reimbursements as income. The Assessing Officer, however, determined that the total amount received by the taxpayer from the India group company for the expense reimbursements ought to have been included in income because these amounts were fees for technical services.

The tribunal rejected this position of the tax administration. The tribunal held that pure reimbursement of costs when an element of profit has not been embedded does not trigger taxability. The tribunal looked to the transfer pricing study to find that no profit element had been included in the reimbursed expenses.

 

Read a May 2017 report [PDF 329 KB] prepared by the KPMG member firm in India

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