Demystifying TDS on Reimbursements: Myths, Case Laws, and Practical Compliance Insights

“Reimbursements are routine, but their taxability is not.”
This single line summarizes the confusion faced by taxpayers and tax authorities alike.

In the modern business environment, cross-border transactions, intra-group services, and shared service arrangements have made reimbursements commonplace. However, whether these payments attract Tax Deducted at Source (TDS) under the Income Tax Act, 1961, often sparks controversy.

This blog aims to clarify the taxability of reimbursements, backed by judicial precedents, practical examples, and compliance-ready strategies.

Understanding Reimbursements: The Starting Point

A reimbursement typically refers to the repayment of an expense originally borne by another party. These can include:

• Travel expenses

• Salary payments under secondment

• Utility bills or third-party charges

• Shared service costs

• Audit fees, courier, postage incurred on behalf of a client or group company

The key issue is whether such payments are pure reimbursements (cost-to-cost) or they carry an income element (mark-up/profit)—which determines their taxability under TDS provisions.

When Are Reimbursements Taxable?

A reimbursement becomes taxable in India if any of the following conditions apply:

Condition	Explanation
Income Element Exists	If the reimbursed amount includes a mark-up or margin, it constitutes income and is taxable.
Lack of Documentary Evidence	If there’s no agreement, invoice, or breakup, the reimbursement may be treated as disguised service or royalty.
Nature of Payment Is Service-Like	Even without markup, if the reimbursement compensates for technical or managerial services (e.g., seconded employees), it may be taxable under Section 9 or DTAA.

When Are Reimbursements Non-Taxable?

Reimbursements are not subject to TDS if:

Condition	Details
Pure Cost-to-Cost Recovery	No margin or profit involved.
Documented Evidence	Invoices from third parties, contracts, and communication clearly support the nature of expense.
Acting as a Conduit	The recipient merely paid the expense on behalf of the payer and seeks repayment.
Supported by Judicial Precedent	Courts have repeatedly ruled in favor of genuine reimbursements backed by evidence.

 Landmark Judicial Precedents

Case 1: Braitrim UK Ltd. [TS-502-ITAT-2019 (Mum)]

Facts:

• UK-based company received payments from an Indian entity.

• AO treated it as royalty under India-UK DTAA.

• The company argued the amount was reimbursement of actual expenses with no profit.

Held:

• Mumbai ITAT held these were non-taxable as pure reimbursements.

• Proper evidence and no mark-up were key to this relief.

Case 2: Flipkart Internet [2022] 139 taxmann.com 595 (Karnataka HC)

Facts:

• Flipkart seconded employees from Walmart Inc.

• Flipkart reimbursed Walmart for salary costs.

• Flipkart applied for Nil TDS under Section 195(2).

Key Issues Analyzed:

Issue	High Court Holding
Applicability of Section 195(2)	Flipkart was justified in seeking Nil TDS Certificate.
FTS or Not?	Payments did not satisfy “make available” test under DTAA → Not FTS.
Employer-Employee Relationship?	Flipkart was deemed economic employer, not Walmart.
Result	Payments were held non-taxable under Article 16 of the DTAA. Nil TDS certificate was allowed.

Final Verdict: In favor of Flipkart. The reimbursement was not taxable, not FTS, and covered under the DTAA protection.

 Real-Life Scenario: With Figures

 Scenario 1: Pure Reimbursement

Company	ABC Ltd. (India)
Transaction	₹5,00,000 paid to Singapore Parent Co.
Nature	Travel reimbursement (airfare, hotel)
Markup	None
Support	3rd party bills attached, trip approval notes, intercompany agreement

Outcome:

✔️ No TDS under Section 195
✔️ Not taxable in India
✔️ Pure reimbursement with documentation

TDS Compliance Matrix: When and What to Deduct?

Type of Reimbursement	TDS Applicable?	Relevant Section	Conditions
Cost-to-cost, fully backed by 3rd party bills	❌ No	N/A	Must be free of markup
Includes markup (profit element)	✅ Yes	Sec 194C/194J/195	Taxable as fee/service
Secondment with economic control	❌ No	Covered under DTAA	Employer–employee relationship confirmed
Secondment but no control	✅ Yes	Sec 9 r/w DTAA	Classified as FTS or salary
Lump-sum reimbursements with no breakup	✅ Yes	Possibly 194J or 195	Treated as service fees in absence of clarity

 Practical Compliance Tips

1. Maintain Contracts and Approvals
   Always document the nature and scope of reimbursement in intercompany agreements.

2. Insist on Third-Party Invoices
   Attach all supporting bills with your books to establish “cost-to-cost” nature.

3. Segregate Mark-Up and Cost
   Do not club reimbursed expenses with service invoices. Raise separate documents.

4. Apply for Section 195(2)/197 Certificate
   If in doubt, apply to the AO to determine the TDS obligation on cross-border reimbursements.

5. Understand DTAA & “Make Available” Clause
   Especially for secondment, apply the “make available” test to check FTS classification.

    Reimbursements are not automatically exempt from TDS.             Their taxability hinges on:

• The presence of an income element,

• The existence of appropriate documentation, and

• The interpretation under applicable DTAA provisions.

Getting this wrong can lead to disallowances, interest, and penalties under Section 40(a)(i)/(ia) or even litigation.