By CA Surekha S Ahuja
Grounded in the Invesco Ruling (Delhi ITAT, 2025)
“Compliance has no shortcuts. It rewards those who choose clarity over convenience and structure over improvisation.”
Introduction — Why This Topic Matters Today
In a world where companies operate on integrated digital infrastructure, group entities routinely depend on centralised IT systems managed by a parent or global shared services centre. These arrangements often involve cost pooling and subsequent cross-border reimbursements.
However, Indian tax authorities frequently seek to recharacterise such reimbursements as technical service fees or income-bearing payments. This leads to prolonged litigation, withholding tax exposure, GST disputes, transfer pricing challenges, and even Companies Act-related non-compliance findings.
The 2025 Delhi ITAT ruling in Invesco Holding Company (US) Inc. v. ACIT brought long-awaited clarity. It affirmed that when IT support is routine, non-strategic, and does not transfer technology, and when recoveries are cost-to-cost with no profit element, the payment is not taxable in India.
This Guidance Note distils the Invesco principles into a unified compliance framework that integrates Income Tax Act, DTAA, GST, Transfer Pricing, and Companies Act obligations—ensuring that intercompany IT reimbursements are structured flawlessly and defended confidently.
Essence of the Invesco Ruling
Delhi ITAT deleted a ₹54.85 crore addition by holding that:
-
The IT services provided were routine operational support such as helpdesk, access management, monitoring, and standard application assistance.
-
These services did not make available any knowledge or capability to the Indian entity as per Article 12(4)(b) of the India–USA DTAA.
-
The cost-sharing model involved actual pooled costs, with clear allocation keys and no markup.
-
The payments were therefore pure reimbursements, not consideration for services.
-
As per Section 90, the DTAA override applied, making the amounts non-taxable.
This ruling now guides how multinational groups should structure their IT reimbursement mechanisms.
Income Tax Treatment Under Section 9, DTAA Article 12 and Section 195
1 Domestic Law View
Section 9(1)(vii) deems technical services income to accrue in India. The definition is expansive and can capture anything remotely technical unless carefully structured.
However, income tax applies only where there is income.
A reimbursement without an income component falls outside the charge.
2 DTAA Override
Under Section 90, DTAA provisions prevail if beneficial.
Article 12(4)(b) of the India–USA DTAA taxes IT support only if the services make available technical knowledge, skill, experience, know-how, or processes enabling the recipient to perform the work independently.
Routine IT support does not satisfy this test because:
-
the Indian entity continues to remain dependent,
-
no proprietary tools or manuals are handed over,
-
there is no ability to perform the support independently later.
Thus, the entire mechanism falls outside FIS.
3 Judicial Support
The Invesco ruling sits firmly on a decade of jurisprudence including:
-
Bio-Rad (Delhi HC): capability transfer is the essence of “make available”.
-
Dassault Systems (Delhi HC): standardised IT support is not FIS.
-
XYZ Technology Services, Boston Consulting, and other cases consistently rejecting taxation of routine support under DTAA.
GST Characterisation — When RCM Applies and When It Does Not
GST operates independently of income tax. The central question is: is there a supply of service?
1 When No GST Applies
If the cross-border payment is a genuine cost-to-cost sharing of pooled corporate IT expenditure without:
-
any independent service intention,
-
any value addition,
-
any markup or qualification as a deliverable,
GST does not apply because there is no supply under Section 7 of CGST Act.
For example, where the foreign entity pays SAP license costs, Microsoft subscriptions, cybersecurity subscriptions and then proportionately bills affiliates, it amounts to pure reimbursement of pooled expenditure.
2 When GST Under RCM Applies
Reverse charge applies when the foreign entity actually performs IT support or IT-enabled functions for the Indian entity.
Here, even if tax authorities accept the cost-to-cost nature for income tax, GST may still apply because GST law is supply-driven.
Typical services that may attract RCM include:
-
helpdesk management,
-
real-time network monitoring,
-
cybersecurity alert handling,
-
software troubleshooting.
RCM GST is neutral as the Indian entity can typically claim full ITC, provided documentation is in order.
3 GST Documentation Requirements
-
A valid intercompany agreement.
-
Monthly cost allocation sheet.
-
Self-invoice under RCM if applicable.
-
Books classification: import of services or cost reimbursement based on nature.
-
ITC claim records.
Companies Act Alignment — A Critical but Often Ignored Angle
Intercompany reimbursements are related party transactions under Sections 177 and 188.
Key compliance components include:
1 Approvals and Governance
-
Audit Committee approval for all related party transactions.
-
Board approval where required.
-
Disclosure in financial statements under Ind AS 24 or AS 18.
2 Arm’s Length Standard
Even if the tax position treats it as reimbursement, Companies Act demands fairness and transparency.
A brief TP benchmarking note showing the reasonableness of cost allocations supports compliance.
3 Documentation Sync with IT and Finance
The organisational risk arises when:
-
IT team signs technical SLAs with service language,
-
finance team records as reimbursement,
-
tax team claims pure cost-to-cost.
This inconsistency has been a frequent litigation trigger.
A single aligned agreement and consistent descriptions across all filings is essential.
The Structuring Blueprint — How to Design a Non-Taxable, Fully Compliant Cost Reimbursement Arrangement
1 The Agreement
The agreement should reflect:
-
the purpose of cost contribution for centralised IT systems,
-
explicit statement of zero markup,
-
definition of cost pool components,
-
transparent allocation keys (headcount, usage, bandwidth, revenue share),
-
clear articulation that services are routine and operational,
-
explicit confirmation that no IP, manuals, or capability is transferred,
-
affirmation of continued dependency of Indian entity.
An agreement drafted with precision is the strongest evidence against tax recharacterisation.
2 Nature of Activities
Activities should be described as:
-
support,
-
monitoring,
-
operational handling,
-
administrative assistance.
Avoid descriptive terms like:
-
consultancy,
-
strategic review,
-
system design,
-
solution architecture.
These words have historically triggered FIS disputes.
3 Cost Pool Validation
Maintain:
-
vendor invoices forming the cost pool,
-
payroll allocation for IT teams,
-
annual certification by independent auditors,
-
cost allocation computation worksheets,
-
internal benefit memos from IT heads.
A thorough evidence chain is the backbone of the tax position.
4 Withholding Tax Protocol
Once DTAA non-taxability is established:
-
obtain TRC and Form 10F,
-
CA certificate confirming DTAA Article 12 non-taxability,
-
file Form 15CA/CB,
-
retain communication trails,
-
maintain folders for each remittance.
Consistency and documentary sufficiency are key to preventing Section 201 exposure.
Transfer Pricing Reporting
Even though the transaction is cost-to-cost, it remains an international transaction.
Therefore:
-
report in Form 3CEB,
-
justify allocation keys through FAR analysis,
-
demonstrate that services generate operational benefit,
-
maintain contemporaneous documentation.
This prevents TP adjustments and strengthens income tax defence.
Litigation Prevention and Assessment-Ready Position
A robust compliance repository should include:
-
the IT cost-sharing agreement,
-
complete cost pool evidence,
-
allocation basis justification,
-
IT support logs,
-
MIS dashboards,
-
cost-benefit notes prepared annually,
-
GST and income tax filings synchronized with each other.
Every word in every document must tell the same story.
Conclusion — The Compliance Perspective
“In cross-border taxation, the narrative must be as strong as the numbers and the structure must speak before the scrutiny begins.”
Intercompany IT reimbursements can be legally and safely treated as non-taxable when based on a pure cost-sharing model, supported by the DTAA’s “make available” principle, and aligned with GST and Companies Act requirements.
The Invesco ruling provides the industry with a clear judicial foundation.
With the right structuring, documentation, and internal alignment, companies can secure tax certainty, minimise litigation risk, and ensure complete regulatory compliance for years ahead.
