Revenue Split vs TNMM in Transfer Pricing

Choosing the Most Appropriate Method under Section 92C – A Strategic Assessment Guide (Delhi ITAT – 2025 TaxPub(DT) 6050)

“Arm’s length begins with pricing logic — not with margins discovered later.”

Choosing the Most Appropriate Method under Section 92C – An Assessment-Grade & Policy-Ready Professional Guide

*“In transfer pricing, adjustments are rarely born from numbers.

They are born from incorrect method selection.”*

In the vast majority of transfer pricing cases, adjustments do not originate because margins are low or comparables are imperfect.

They originate far earlier — at the moment TNMM is mechanically adopted, without first asking the legally mandated question:

Is CUP feasible for this transaction?

This phenomenon is most visible in freight forwarding, logistics coordination, and intermediary service models, where business reality operates on pre-agreed pricing formulas, not on residual profit expectations.

The recurring controversy is therefore fundamental, not technical:

Can a revenue split represent a valid CUP, or must the transaction inevitably collapse into TNMM merely because margin benchmarking is easier?

Reasoned Reality

TNMM is frequently preferred because it:

• Requires minimal understanding of transaction mechanics

• Aggregates outcomes instead of analysing pricing behaviour

• Provides statistical comfort to the authority

However, ease of application is not a criterion recognised by Section 92C.

Professional Caution

Once TNMM is prematurely adopted:

• Transaction-level pricing logic is irretrievably lost

• Intermediary economics are mischaracterised as entrepreneurial

• The taxpayer is forced into a margin defence — a structurally weak position

Why the Delhi ITAT Decision Matters (2025 TaxPub(DT) 6050)

The Delhi ITAT ruling does not create taxpayer preference.
It restores statutory discipline.

It reiterates that:

• Method selection is a legal exercise, not an administrative one

• TNMM is not a default or “safe” method

• CUP cannot be rejected without demonstrating why it fails

This post is therefore not commentary.
It is a professional operating manual for:

• Method selection at TP policy stage

• Assessment-stage defence

• Documentation architecture

• Litigation risk containment

Statutory Framework — Section 92C as Enacted, Not as Conveniently Applied

Section 92C mandates that ALP be determined using the most appropriate method, considering:

• Nature of the international transaction

• Class of associated enterprise

• FAR profile

• Availability and reliability of data

Reasoned Interpretation

The statute does not prioritise methods based on:

• Officer familiarity

• Ease of benchmarking

• Litigation convenience

Professional Caution

There exists no statutory hierarchy making TNMM the default.

Under Rule 10B(1)(a):

• CUP is the first method where price can be directly determined

• TNMM is permissible only after CUP is shown to be unworkable

TNMM is a method of last resort — not administrative convenience.

Foundational Principle Reaffirmed by Courts

Price precedes profit. Always.

Arm’s length analysis tests:

• Whether independent parties would agree to the same price or pricing formula

It does not test:

• Whether the resultant margin appears reasonable or comfortable

Reasoned Logic

Profit is an outcome.
Testing outcomes instead of pricing behaviour reverses the statutory design.

Professional Caution

When margin comfort becomes the test:

• Thin-margin intermediaries become structurally vulnerable

• Commercial behaviour is replaced by statistical averages

Where pricing mirrors market behaviour, ALP is satisfied — even if margins fluctuate.

Revenue Split: CUP or Profit Split? — The Decisive Characterisation Test

Revenue authorities frequently misclassify revenue split models as Profit Split Method (PSM).

This is not a nomenclature issue.
It is methodologically fatal.

Revenue Split qualifies as CUP when:

• The split is embedded contractually

• It governs invoice-level billing

• It operates before profit determination

• It reflects how independent agents are remunerated

Revenue Split becomes PSM only when:

• Applied after profit computation

• Allocates residual entrepreneurial returns

• Depends on subjective contribution analysis

Judicial Clarity

👉 Delhi ITAT (2025 TaxPub(DT) 6050) confirms:
What governs pricing governs method characterisation.

Professional Caution

Mischaracterisation typically arises where:

• Agreements are loosely drafted

• Pricing logic is not contemporaneously documented

• Invoices fail to reflect the pricing mechanism

Non-Negotiable Thumb Rules (Settled Law)

The following principles are now crystallised:

• CUP overrides TNMM where pricing logic is demonstrable

• Revenue split is not PSM if it governs pricing

• Industry practice must be proven, not asserted

• Past acceptance is persuasive, not binding

• Rule 46A invocation mandates adjudication on merits

• TNMM requires demonstrated failure of CUP

Professional Warning

Ignoring even one of these principles:

• Silently shifts the burden to the taxpayer

• Makes adjustment nearly inevitable

Strategic Method Selection — The Practitioner’s Reality Test

Revenue Split (CUP) is appropriate where:

• Origin and destination entities are functionally symmetric

• Both are asset-light intermediaries

• Pricing is pre-agreed and formula-driven

• Pass-through costs are clearly excluded

• Documentation exists at transaction level

TNMM is strategically safer where:

• One entity bears entrepreneurial risk

• Functions are asymmetric

• Split is selectively applied

• Pricing mechanics cannot be evidenced contemporaneously

Professional Insight

Method selection is not ideological.
It is about risk containment and credibility.

Strategic maturity lies in choosing the right battle — and sometimes, the right retreat.

How CUP Must Be Presented in TP Documentation

CUP must never be presented defensively.

Documentation should demonstrate:

• Why CUP naturally fits the industry

• How pricing is determined ex ante

• Why TNMM distorts intermediary economics

• How independent parties would price identically

Professional Reminder

Courts evaluate commercial behaviour, not spreadsheet comfort.

Documentation That Actually Withstands Scrutiny

Core (Mandatory)

• Inter-company agreements specifying revenue split

• Invoices reflecting identical pricing mechanics

• Cost sheets segregating pass-through costs

• FAR analysis establishing symmetry

High-Impact Support

• SOPs / internal emails explaining pricing logic

• Industry publications

• Prior year accepted TP orders

• Third-party confirmations

Instant Weakness Indicators

• Post-facto rationalisation

• Unexplained changes in split ratios

• Split applied only to AEs

• Absence of invoice-level proof

TPO-Ready Argument Note 

Procedural Shield — Rule 46A

Where:

• Additional evidence is called for by CIT(A), or

• Matter is remanded for comments

Rejection without adjudication on merits is per se invalid.

This procedural ground alone has reversed numerous adverse orders.

Consistency — Correct Framing

❌ Accepted earlier, therefore binding
✔ Identical facts examined earlier; deviation requires justification

Courts protect reasoned consistency, not entitlement.

Assessment-Room Reality Check

Revenue Objection	Correct Counter
Revenue split is PSM	It governs pricing → CUP
No comparables	Internal CUP exists
Margins are low	ALP tests price
Industry practice unproven	Agreements + invoices
TNMM is safer	Safety is not law

One-Line Practitioner Rule

A revenue split survives scrutiny not because it is popular, but because it is commercially inevitable, provable, and consistently applied.

TP Policy Insert for Logistics & Freight Groups

Policy Objective

To ensure arm’s length pricing for intra-group freight forwarding and logistics services by adopting pricing mechanisms that reflect commercial reality and statutory intent under Section 92C.

Policy Principle

Group entities engaged as logistics intermediaries shall be remunerated based on pre-agreed pricing formulas, not residual profit outcomes.

Approved Pricing Method

• Primary Method: CUP based on revenue split where:

  • Entities are functionally symmetric

  • Services are asset-light

  • Pricing governs billing stage

• Fallback Method: TNMM only where CUP is demonstrably unworkable

Pricing Architecture

• Revenue base defined net of pass-through costs

• Revenue split ratio pre-agreed and contractually embedded

• Pricing applied consistently across periods

Documentation Standards

• Inter-company agreements to expressly define pricing formula

• Invoices to mirror pricing mechanics

• FAR analysis to be updated annually

• Deviations to be documented contemporaneously with justification

Governance & Review

• Annual method validation under Rule 10B

• Any change in pricing mechanism to be approved by Group Tax Head

• TNMM adoption requires documented CUP failure analysis

Risk Control Statement

TNMM shall not be adopted merely for benchmarking convenience where transaction-level pricing is demonstrable.

Final Professional Note

The Delhi ITAT decision in 2025 TaxPub(DT) 6050 does not tilt the balance.

It restores discipline.

Those who:

• Understand their business

• Document pricing contemporaneously

• Choose methods strategically

Will find this ruling a powerful ally.

Those who rely on margin comfort will not.

UAE LLC Liquidation & Repatriation to India: A Complete Tax & Compliance Roadmap

By CA Surekha S Ahuja

Scenario: A couple has set up a UAE LLC and now wishes to wind it up and bring the proceeds to India. What is the most legitimate way to do this, and what are the tax implications?

Navigating cross-border business closure and repatriation requires precise compliance under UAE company law, Indian FEMA regulations, Income Tax provisions, residential status rules, and the India-UAE DTAA. Here’s a step-by-step professional guide.

Part I: UAE LLC Liquidation Procedure

The UAE Federal Law No. 32 of 2021 (New Commercial Companies Law) governs the LLC liquidation process. Key stages include:

1. Board/Shareholder Resolution

   • Approve voluntary liquidation and appoint a licensed liquidator.

   • Notarization required (approx. AED 800).

2. Initial Approval Application

   • Submit to relevant authority (DED for mainland; Free Zone authority for JAFZA/RAK) with MOA, trade license, shareholder IDs, and liquidator letter.

   • Fee: ~AED 2,010 for mainland LLC.

3. Publication of Liquidation Notice

   • In two newspapers (Arabic & English) for minimum 45 days to allow creditor claims.

4. Creditor Notification & Settlement

   • Settle employee dues, supplier bills, utility obligations, and lease obligations.

5. Obtain Clearance Certificates (NOCs)

   • Telecom, utilities, Ministry of HR, Free Zone authority (if applicable), banks, property authorities.

6. Cancel Immigration Records

   • All employee and sponsor visas linked to company must be cancelled.

7. Final Audit Report

   • Liquidator prepares full Statement of Affairs including assets, liabilities, employee settlements, and cash balances.

8. Final Liquidation Certificate

   • Issued by DED/Free Zone authority confirming completion and trade license cancellation.

Timeline: Typically 60–90 days (including 45-day creditor period).

Part II: Taxation on Liquidation Proceeds in India

Capital Gains under Section 46 of the Income Tax Act

• Proceeds received on liquidation of a foreign company are taxed as capital gains in India under Section 46(2).

• Computation:

$$\text{Capital Gain} = \text{Money/Assets Received} - \text{Dividend component u/s 2(22)(c)} - \text{Cost of Acquisition of Shares}$$

• UAE LLC qualifies as a “company” under amended Section 2(17), making Section 46 fully applicable.

Short-Term vs Long-Term Capital Gains

• Unlisted foreign shares:

  • Holding ≤ 24 months → Short-term (taxed at slab rate).

  • Holding > 24 months → Long-term (concessional rate).

• Rates:

  • Residents (ROR/RNOR): Long-term 12.5%, Short-term at slab rate.

  • Non-Residents: Long-term 10% (no indexation), Short-term at slab rate.

Foreign Exchange Considerations

• Gains are computed in INR at the spot rate on distribution.

• No benefit for indexation or FX fluctuation for non-residents.

Part III: Residential Status & Tax Implications

1. Determining Residential Status (Section 6(1))

• Resident: ≥182 days in India OR ≥60 days in year + ≥365 days in preceding 4 years.

• ROR vs RNOR: ROR if 2/10 years residency + 730/7 years physical presence conditions met.

2. Tax Implications by Status

Residential Status	Capital Gains Tax (LTCG)	Global Income Taxable	DTAA Benefits
ROR	12.5% on unlisted shares	Yes	Yes (TRC required)
RNOR	12.5%	No	Yes (TRC required)
NR	10% (no indexation)	No	Yes (TRC required)

Key: Tax rate depends on residential status on liquidation distribution date.

Part IV: India-UAE DTAA Considerations

1. Article 13 – Capital Gains:

   • Capital gains from UAE company shares are taxable in UAE (country of incorporation).

   • UAE has 0% personal income tax, making gains potentially tax-free if TRC obtained.

2. Limitation of Benefits (LOB) & Principal Purpose Test (PPT):

   • DTAA benefits denied if the LLC was created mainly for tax advantage without genuine business activity.

   • Maintain economic substance: employees, office, transactions.

3. UAE Tax Residency Certificate (TRC):

   • Present ≥183 days in UAE calendar year.

   • Apply via EmaraTax portal, valid 1 year.

4. Form 10F Filing in India:

   • Mandatory if claiming DTAA benefit.

   • Disclose personal details, UAE TIN (if any), address, income type, and attach TRC.

Part V: Repatriation under FEMA

• Proceeds from liquidation: Considered capital inflow under FEMA regulations.

• Compliant route:

  1. Obtain UAE liquidation certificate.

  2. Open FCNR/NRE/NRO account in India (as per FEMA).

  3. Submit Repatriation request with bank including liquidation certificate, board resolution, and bank statement from UAE.

• Ensure tax compliance in India (TDS / self-assessment) before repatriation to avoid defaults.

Key Takeaways for Practitioners

• Liquidation must strictly follow UAE law to obtain valid certificate.

• Residential status and holding period determine Indian tax rates.

• Proper TRC & Form 10F filings unlock DTAA benefits and prevent double taxation.

• Maintain genuine economic substance to avoid LOB/PPT challenges.

• FEMA-compliant repatriation ensures smooth inflow into India.

Professional Note: Cross-border liquidation and repatriation require meticulous documentation, sequential compliance, and tax planning. Missing any step—be it UAE NOCs, residential status certification, or DTAA filings—can lead to default notices or tax disputes.

Permanent Establishment (PE) in India — Comprehensive Guidance Note for Global Businesses

By CA Surekha S Ahuja

Permanent Establishment (PE) is the key gateway for taxing non-resident business profits in India under Section 5(2), Section 9(1)(i) of the Income-tax Act and Articles 5 & 7 of DTAAs. Misinterpretation exposes non-resident enterprises to tax, TDS obligations, transfer pricing scrutiny, penalties, and litigation.

This guidance note merges law, judicial interpretation, PE types, profit attribution rules, practical compliance measures, and risk mitigation frameworks for global businesses.

Universal PE Test

A PE exists only when all three pillars are satisfied:

• Permanence: Continuous presence in India; not transient.

• Place of Business: A location “at the disposal” of the foreign enterprise.

• Business Activity: Core business functions carried out through that place.

Supreme Court & HC Clarifications:

• Formula One (SC): Disposal + control + permanence = PE.

• E-Funds (SC): Outsourcing or auxiliary functions do not create PE.

• UAE Exchange (SC): Preparatory/auxiliary activities ≠ PE.

• Morgan Stanley (SC): Employee deputation may create Service PE, but ALP remuneration may neutralise attribution.

Types of PE, Judicial Support & Practical Compliance

Fixed Place PE

Definition: Physical place at disposal of foreign enterprise carrying out core business.
Judicial Support: Formula One (SC), E-Funds (SC), UAE Exchange (SC)
Planning & Compliance:

• Limit Indian presence to auxiliary functions

• No contract rights over premises

• Keep servers, IP, and revenue-generating activities offshore

Service PE

Definition: Triggered when employees render services in India beyond DTAA thresholds.
Typical Thresholds: OECD: 183 days, India-US: 90 days, India-UK: 90 days, India-Singapore: 30 days/project
Judicial Support: Centrica India Offshore (Del HC), Morgan Stanley (SC)
Planning & Compliance:

• Track onsite employee presence

• Split onsite/offshore services

• Maintain ALP remuneration

• Strategic decisions offshore

Agency PE

Definition: Indian agent habitually concludes contracts, plays principal role, or works exclusively for NR.
Judicial Support: LG Korea (Del HC), Galileo (Del HC), Amadeus (Del HC)
Planning & Compliance:

• Independent agents with multiple clients

• Marketing support only; no binding authority

• HQ approvals for contracts

Dependent Agent PE (DAPE)

Definition: Agent economically or operationally dependent on NR.
Judicial Support: Sony Mobile, E-Funds, India-US DTAA commentary
Planning & Compliance:

• Multiple principals

• Avoid stock maintenance in India

• Document independent economic existence

Construction/Installation/Assembly PE

Definition: Construction, installation, or assembly exceeding DTAA thresholds (6–12 months).
Judicial Support: Hyosung (Del HC), Norsk Hydro (AAR), Samsung Heavy Industries (Del HC)
Planning & Compliance:

• Separate offshore supply/services

• Maintain Gantt charts, site logs, project diaries

• Controlled presence of engineers

Subsidiary PE

Definition: Subsidiary may constitute PE if it acts as a “virtual projection” of NR.
Judicial Support: E-Funds (SC), Rolls Royce (Del HC)
Planning & Compliance:

• Independent governance & decision-making

• ALP pricing & functional separation

Liaison Office PE

Principle: PE arises only if LO exceeds preparatory/auxiliary activities.
Judicial Support: UAE Exchange (SC), airline/shipping cases
Safe Activities: Research, communication, promotion
Risk Activities: Contract negotiation, revenue collection, invoicing

Digital PE / Significant Economic Presence (SEP)

Definition: Digital interactions with Indian users; threshold not yet notified.
Judicial Support: E-Funds (SC), Right Florists (ITAT)
Planning & Compliance:

• Servers offshore

• Evidence of algorithmic control abroad

• Equalisation levy compliance

Server PE

Definition: Server in India under foreign control performing core business functions.
Judicial Support: OECD commentary, E-Funds (SC)
Planning & Compliance:

• Third-party hosting offshore

• Document cloud ownership and access control

Profit Attribution (Article 7 / FAR Approach)

Formula:
Profits attributable to PE = Global Profits × (FAR of Indian functions / Global FAR) − ALP remuneration to Indian affiliate

Judicial Support:

• Morgan Stanley (SC): ALP remuneration neutralises further attribution

• Set Satellite (Bom HC): Scientific attribution required

• E-Funds (SC): No PE → no attribution

Documentation Required: FAR analysis, master & local files, project logs, service deployment records.

PE Risk Mitigation Framework

Contractual Design:

• Offshore negotiation and conclusion

• “Approval by HQ mandatory” clauses

• No authority for Indian entity to bind NR

Operational Controls:

• Core IP, servers, revenue offshore

• Limit Indian roles to auxiliary/preparatory

Employee Mobility Controls:

• Track all foreign employee day counts

• Automated alerts for threshold breaches (60/90/120/180 days)

Subsidiary Governance:

• Independent board, ALP pricing, functional separation

Liaison Office Safeguards:

• Auxiliary activities only

• Avoid revenue generation

Digital & Server Controls:

• Offshore server ownership & control

• System architecture diagrams & access logs

Visual Summary — All PE Types

PE Type	Trigger	Judicial Support	Planning Tips
Fixed Place PE	Physical location at disposal	Formula One, E-Funds, UAE Exchange	Limit presence, offshore servers
Service PE	Employees present > DTAA threshold	Centrica India Offshore, Morgan Stanley	Track days, offshore delivery, ALP remuneration
Agency PE	Agent concludes contracts	LG Korea, Galileo, Amadeus	Independent agent, HQ approvals
Dependent Agent PE	Agent economically dependent	Sony Mobile, E-Funds	Multiple principals, no stock maintenance
Construction/Installation PE	Projects exceed threshold	Hyosung, Norsk Hydro, Samsung Heavy Industries	Split contracts, logs, controlled presence
Subsidiary PE	Acts as virtual projection of NR	E-Funds, Rolls Royce	Functional independence, ALP pricing
Liaison Office PE	Only exceeds auxiliary/preparatory	UAE Exchange	Limit to research/marketing, no revenue
Digital/SEP PE	Digital presence / users	E-Funds, Right Florists	Offshore servers, algorithm control
Server PE	Server under NR control	OECD Commentary, E-Funds	Offshore hosting, access logs

Key Takeaways for Global Businesses

• PE exists only if the foreign enterprise truly conducts business in India.

• Auxiliary/preparatory functions, offshore control, ALP remuneration, and robust documentation defend a No PE position.

• Courts consistently emphasise territoriality, disposal, functional control, and factual thresholds.

• Modern digital business models may require treaty updates; until then, judicially aligned compliance is the safest route.

This note represents the most refined, judicially integrated, and practitioner-grade guidance on PE in India, combining law, interpretation, attribution, planning, and compliance.

Procedural & Documentation Masterguide for Intercompany International IT Cost Reimbursements

By CA Surekha S Ahuja

Across Income Tax, GST, and Companies Act Compliance for India-Based and Global Entities

"Compliance is not merely following rules; it is structuring, documenting, and executing transactions so that every step speaks for itself under scrutiny."

INTRODUCTION

Cross-border intercompany IT cost reimbursements—between a global parent or overseas branch and an Indian entity—are common yet highly scrutinized. Risks include:

• Recharacterization as Fees for Technical Services (FTS) or Fees for Included Services (FIS)

• Misapplied GST or reverse charge provisions

• Related-party transaction issues under the Companies Act

• Potential transfer pricing adjustments

Without a disciplined framework, routine cost-sharing arrangements can trigger audits, penalties, or litigation.

This blueprint provides a step-by-step, audit-proof framework for structuring, executing, and documenting intercompany IT cost reimbursements in a tax-efficient and legally defensible manner.

PRE-IMPLEMENTATION CONTROL SYSTEM

1 Transaction Characterization

• Nature: Service, reimbursement, or composite

• Related-party status: Domestic or cross-border

• Fee type: Cost-to-cost recovery vs. markup

• Purpose: IT operations support, helpdesk, monitoring

2 Regulatory Mapping

• Income Tax: TDS sections, deductibility, treaty implications

• GST: SAC codes, rate, reverse charge mechanism, ITC eligibility

• Companies Act: Sec. 188 approvals, MBP-1 disclosures

• Transfer Pricing: Cost contribution agreements, arm’s length validation

3 Internal Diagnostic File Note

Document:

• Commercial rationale

• Regulatory mapping

• Valuation approach

• Risk assessment

• Planned evidence trail

This becomes the foundation for all future defense in case of audit or litigation.

DOCUMENTATION BEFORE EXECUTION

1 Board / Management Approval

Board note should include:

• Transaction background and necessity

• Commercial justification and arm’s length rationale

• Scope and fee/reimbursement mechanism

• Delegation of authority and approvals

2 Agreement Essentials

Ensure clarity and defensibility:

• Scope of Services: Operational IT support, clearly enumerated

• Fee Structure: Cost-to-cost, zero markup, supported by third-party invoices

• Tax Clauses: GST, TDS, withholding provisions

• Record-Keeping: Obligations for both parties

• Term & Termination: Fixed term, renewal and exit conditions

• Exclusion Clause: No transfer of IP or autonomous capability

EXECUTION PROCEDURES

1 Invoicing Protocol

• Include service/reimbursement description

• Correct SAC / HSN codes

• Reference agreement and period

• Attach supporting third-party invoices

• Declare “cost only, no markup”

2 TDS Compliance

• Identify correct TDS section

• Deduct at time of credit or payment

• Deposit timely and file quarterly returns

• Issue Form 16A and reconcile with 26AS

3 GST Compliance

• Verify classification and rate

• Apply forward charge or RCM as applicable

• Follow time-of-supply rules

• Avail ITC only after supplier invoice reflects in GSTR-2B

• Maintain service consumption evidence

4 Companies Act Compliance

• Obtain MBP-1 declarations

• Board approval/resolution for related-party transactions

• Maintain contract register under Sec. 189

• Document arm’s length rationale

POST-EXECUTION CONTROL & DOCUMENTATION

1 Audit Trail

Maintain:

• Signed agreements and board resolutions

• Invoices, bills, payment proofs

• Service delivery proof and cost allocation evidence

• GST ledgers and reconciliations

• TDS calculation sheets and challans

• Communication/email evidence

2 Annual Management Certification

Confirm:

• Services delivered per agreement

• Reimbursements match actual costs

• No personal/non-business expenditure

• Compliance with all regulatory obligations

INCOME TAX PROCEDURAL BLUEPRINT

• Prepare TDS determination note

• Maintain defense-ready folder: agreement, ledgers, bank proofs, 26AS

• Document commercial rationale and arm’s length validation

• Link service delivery to reimbursement

GST PROCEDURAL BLUEPRINT

• Prepare GST position note: classification, RCM, ITC, valuation

• Avail ITC only after invoice reflection and service receipt

• Maintain reimbursement chain and reconciliations

COMPANIES ACT PROCEDURAL BLUEPRINT

• Director MBP-1 disclosures

• Board resolution approval and minutes

• Maintain contracts and related-party registers (Sec. 189)

• Document arm’s length rationale for cross-border cost sharing

MODEL AGREEMENT HIGHLIGHTS

Title: Group Cost Contribution Agreement – Centralized IT Support

• Scope: Operational IT services only

• Fee/Reimbursement: Cost-to-cost, zero markup, supported by invoices

• Exclusions: No IP transfer or know-how sharing

• Tax Compliance: GST and TDS clauses

• Record-Keeping: Audit-ready obligations

• Term & Termination: Fixed term with clear exit conditions

• Arm’s Length Confirmation: Commercial justification statement

INTERNAL COMPLIANCE CHECKPOINTS

Stage	Checklist
Pre-Transaction	Agreement, board approval, MBP-1, TDS & GST notes
Monthly	Invoices, RCM, ITC, TDS deposit, service delivery evidence
Annual	26AS / IT reconciliation, GSTR-2B alignment, contract register, management certification

CLOSING

A transaction becomes legally sound when its law is correct, procedurally strong when steps are disciplined, and fully defensible when documents tell a complete, consistent story. Compliance is not a burden—it is a shield. With this procedural blueprint, every intercompany IT cost reimbursement is clear, traceable, justified, and protected across Income Tax, GST, and Companies Act regimes.

Structuring Non-Taxable Intercompany IT Cost Reimbursements in India

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:

1. The IT services provided were routine operational support such as helpdesk, access management, monitoring, and standard application assistance.

2. 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.

3. The cost-sharing model involved actual pooled costs, with clear allocation keys and no markup.

4. The payments were therefore pure reimbursements, not consideration for services.

5. 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.