Mumbai tax tribunal ruling wherein it was held that cost to cost reimbursement must be substantiated with proper supporting documents explaining details of the costs incurred on behalf of affiliates and basis for considering the same as reimbursement.

Key excerpts from the ruling

• The taxpayer, being a US tax-resident is providing services in the areas of general management, internal audit, communication, human resource, finance, and treasury, data processing and information technology, food safety and quality control, supply chain and manufacturing business development and other related areas to its Indian affiliate;
• The taxpayer received INR. 5.18 crores towards cost allocation i.e. recovery of expenses from Indian affiliate which was not offered to tax as it was pure reimbursement without any mark-up;
• Tax authorities rejected this contention as no documentary evidence was submitted for cost allocation and also observed that the services provided are technical in nature satisfying ‘make available’ clause and therefore taxable as Fee for Technical Service (‘FTS’);
• In this context, the tribunal observes that the taxpayer has raised a single invoice for all the costs incurred by different cost centres. But based on the support service agreement, the taxpayer was required to determine each allocable cost by adopting an allocation factor;
• The tribunal on perusal of the agreement finds that a mark-up of 0% was to be applied to costs of performing support services unless a different mark-up is required under the US Transfer Pricing Rules. However, it was observed that the taxpayer did not submit any details of such relevant cost factor for the cost allocation by respective cost centres;
• Further to this, the tribunal observed that documents submitted by the taxpayer as well as the support services agreement does not give any clarity on various costs that were recovered from the Indian affiliate as reimbursements. Merely because there is a general clause in the agreement entered into by the taxpayer with its Indian affiliate, the expenses shall not be considered as reimbursements;
• In absence of such information as well as non-submission of any documents in support of allocation and the basis of allocation, the tribunal affirms the findings of tax authorities that such reimbursements are subject to tax as technical services.

Based on this ruling, it is to be noted that merely having a service/ support agreement is not enough to substantiate cost to cost reimbursement. The transaction must be supported by the requisite backups and allocation mechanism also.