The New Delhi Bench of the Income Tax Appellate Tribunal held that a cost-to-cost reimbursement of expatriate salaries paid by a foreign parent and later reimbursed by the Indian affiliate does not qualify as taxable Fees for Technical Services (FTS).
Reimbursement treated as salary: The ITAT found the ₹2,08,41,050 reimbursed by Toyotsu Rare Earths India Pvt. Ltd. to Toyota Tsusho Corporation was salary reimbursement, not FTS.
No markup, no FTS exposure: The reimbursement was on a cost-to-cost basis without any markup, and the Transfer Pricing Officer did not dispute that characterization.
TDS already applied on salaries: Salaries of the expatriate employees were subject to tax deduction at source under Section 192 in India, supporting the non-FTS view.
# What the case decided
# Facts of the matter Toyota Tsusho paid salaries to expatriate employees who were sent on deputation to TREI. TREI reimbursed those salary costs to Toyota Tsusho on a cost-to-cost basis with no markup. The Transfer Pricing Officer acknowledged that the reimbursement was at cost. The tax department sought to treat the reimbursement as FTS, thereby bringing it into taxable income for the foreign payer.
# Tribunal's reasoning The ITAT drew a line between a genuine reimbursement of salary and a payment that could constitute FTS. Key points in the tribunal's reasoning:
# Practical implications for multinational groups For foreign parents that pay salaries for employees seconded to Indian affiliates, this ruling indicates that a proper cost-to-cost reimbursement mechanism with no markup, supported by documentation and transfer-pricing acknowledgment, reduces the risk that such receipts will be taxed as FTS in India. Tax withholding on the salaries under Section 192 will also be relevant when assessing whether additional tax exposure is appropriate.
# Case details and representation Case title: Toyota Tsusho Corporation vs DCIT, ITA No.1828/Del/2018. The petitioners were represented by Shri Vishal Kalra, Ms Sumisha Murgai, and Ms Kashish Gupta. The respondent was represented by Dr Shalini Verma and Shri Surender Jatav.
# Bottom line When a foreign parent pays salaries for employees deputed to an Indian affiliate and the Indian entity reimburses those costs on a strict cost-to-cost basis without markup, the reimbursement is treated as salary and not taxable as Fees for Technical Services according to this ITAT ruling.
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