Cross-border dealings with Associated Enterprises (AEs) often involve reimbursements of costs such as shared services, employee deputation, or group expenses. A recurring question for Indian businesses is: Should tax be deducted at source (TDS) under section 195 on such reimbursements, and if not, can the expense still be disallowed under section 40(a)(i)?
The answer lies in the income element test. Section 195 mandates TDS only where the sum is chargeable to tax in India. Section 40(a)(i) disallows expenses where tax was deductible but not deducted. Thus, the crux is whether the reimbursement carries any income character in the hands of the recipient AE.
Law & Interpretation
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Section 195, Income-tax Act, 1961 – Requires TDS on payments to non-residents that are chargeable under the Act.
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Section 40(a)(i) – Disallows expenditure (interest, royalty, fees for technical services, or other sums chargeable) if TDS was deductible but not deducted.
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Judicial Principle (GE India Technology, SC 2010) – TDS applies only when the payment bears the character of “income” in India. Pure reimbursements, without markup or profit, generally do not.
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Practical Note – The onus lies on the payer to prove that the reimbursement is cost-to-cost, well-documented, and not in the nature of fees, services, or income.
Decision Matrix for Practitioners
✅ When TDS Not Required
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Cost-to-cost reimbursements with no markup.
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AE incurs expenditure on behalf of Indian entity and recovers exact cost.
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Full documentation available (agreements, invoices, proof of payment).
❌ When TDS Required
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Reimbursements with markup or profit element.
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Shared services/management fees bundled as “reimbursements.”
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Payments linked to FTS/royalty/business income chargeable in India.
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Lack of documentary evidence proving cost-to-cost nature.
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Visual Flow (Simplified):
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Does the reimbursement include profit/markup? → Yes → TDS applies (Sec. 195), else go further.
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Is it linked to services taxable in India (FTS/royalty)? → Yes → TDS applies.
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Pure cost-to-cost with documentation? → No TDS, no disallowance u/s 40(a)(i).
Judicial Precedents
| Case Name | Court/Year | Principle Laid Down |
|---|---|---|
| GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456 (SC) | Supreme Court, 2010 | Section 195 applies only where payment is chargeable to tax in India. |
| CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom.) | Bombay HC, 2009 | Pure reimbursements without income element are not taxable; no TDS. |
| Marks & Spencer Reliance India (P.) Ltd. v. DCIT [2017] 85 taxmann.com 207 (Mum. Trib.) | ITAT Mumbai, 2017 | AE reimbursements without markup not taxable; Sec. 40(a)(i) disallowance unjustified. |
| Danfoss Industries (P.) Ltd. v. ACIT [2019] 108 taxmann.com 369 (Chennai - Trib.) | ITAT Chennai, 2019 | Cost-to-cost reimbursements are not “income”; no TDS obligation. |
| TE Connectivity Services India (P.) Ltd. v. DCIT [2025] 177 taxmann.com 792 (Bang. Trib.) | ITAT Bangalore, 2025 | ESOP reimbursements taxed in India are cost-to-cost; no TDS; no 40(a)(i) hit. |
Practical Closure
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Golden Rule: If there is no income embedded in the reimbursement, no TDS is required.
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Risk Zone: If documentation is weak, or reimbursement is bundled with taxable services, the Revenue may invoke section 40(a)(i).
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Best Practice:
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Maintain robust inter-company agreements.
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Ensure audit trail of actual cost (invoices, payslips, third-party bills).
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Obtain CA certificate (Form 15CB) where ambiguity exists.
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Keep judicial precedents ready as support in case of scrutiny.
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In summary, documented cost-to-cost reimbursements escape TDS liability and cannot be disallowed under section 40(a)(i). However, practitioners must carefully assess the nature of the payment and maintain bulletproof compliance to defend against Revenue challenges.
