The Delhi ITAT deleted disallowances of ₹1.83 crore (AY 2020-21) and ₹2.53 crore (AY 2021-22) made u/s 40(a)(i) on salary reimbursements by the Indian branch of a Spanish company to its head office.
The branch employed expatriates working under its direct control in India. Part of their salaries was paid abroad by the head office and later reimbursed on a cost-to-cost basis (no markup). Full TDS was already deducted u/s 192 on the total salary-both in India and abroad. The Assessing Officer had treated the payments as “fees for technical services” (FTS) under the India-Spain DTAA, applying Section 195.
The ITAT held that:
- The branch was the real and economic employer of the expats.
- Reimbursements without markup, with proper TDS under Section 192, are not subject to Section 195.
- In case of conflicting views, the interpretation favourable to the assessee prevails (Vegetable Products Ltd.).
Takeaway: Properly documented salary reimbursements with correct TDS compliance cannot be taxed again as FTS merely because part of the payment flows via a foreign head office.