Reimbursements or Technical Services’? The Cross-Border Tax Debate
1. Introduction
Multinational companies frequently cross-charge expenses to group companies – seconded employees, management fees, IT support, marketing spends, etc.
Tax authorities often dispute the nature of such payments, leading to classification battles: reimbursement vs. FTS (fees for technical services) vs. business profits vs. capitalisation.
2. Why Reimbursements Are Disputed
Pure reimbursement claim: The payer asserts that the payment is a pass-through without any income element.
Tax authority’s view: Many reimbursements are alleged to carry an embedded markup, technical services, or benefit to the payer.
3. Litigation focus:
Absence of supporting documentation (invoice breakdown, cost-sharing agreement).
Whether there is “benefit test” satisfaction.
Whether withholding tax under Sec. 195 of the Income Tax Act was required.
4. Judicial Trends:
Salary reimbursements of expatriates
Benetton India (Delhi HC, 2025) – Salary paid by Indian entity but reimbursed by foreign AE was held not taxable as FTS, as employees were under Indian control.
Centrica India Offshore (Delhi HC, 2014) – Contrasting view; held that secondment led to FTS exposure.
Issue: Employer–employee relationship test vs. provision of managerial/technical services.
5. Conclusion:
Cross-border reimbursements sit at the intersection of withholding tax, and Transfer Pricing Disputes.
Courts are now leaning towards the principle that true reimbursements without income character are not taxable, but the burden of proof lies entirely on the taxpayer.
With cases like Benetton India clarifying the position, corporates must focus on evidence, documentation, and contemporaneous agreements to avoid protracted litigation.
Team: Economiclawspractice.com
