Reimbursement claimed on welfare expenses incurred by multinationals in India outside gamut of tax: ITAT, CFO News, ETCFO

In what could have an impact on multinationals incurring expenses for the welfare of employees amidst Covid pandemic, a tax tribunal has articulated conditions for reimbursement of expenses from the parent.

The Pune bench of Income Tax Appellate Tribunal (ITAT) in a ruling has put two conditions for Indian arms for reimbursement of expenses incurred in India without having tax implications. The ITAT said that there should be a one-to-one direct correlation between the outgo of the payment and inflow of the receipt. Secondly, the receipt and payment must be of identical amount that is without the profit element.

As per the details of the case a Germany based company– as BYK Germany– that has a unit in Singapore and undertakes testing facilities and technical support services in the Asia Pacific region and has operations in India too.

The company has a permanent establishment or PE in Singapore. PE is a concept in tax regulations that determine which country has the first right to tax the company.

The company had incurred certain welfare and training expenses in India. And had also conducted an event in Germany where some clients who operated from India. The tax department said that tax (TDS) should be levied on such expenses.

The ITAT shot down the taxman’s demand and put out the two conditions for levying any tax.

“The ruling reiterates that mere reimbursements without any profit element are not in the nature of any income and therefore such payments cannot be made subject to provisions of deduction of tax at source and consequent disallowance under section 40(a)(i) of the Income Tax Act. ITAT elaborately explained that to qualify as reimbursement, one-to-one correlation between outflow and receipt and absence of profit element is paramount,” said Rakesh Nangia, Managing Partner of Nangia Andersen India.

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