Our US parent charges us only its actual cost for services it performs in America, with no mark-up. Must we still withhold tax under section 195?
Yes. The Authority ruled against the applicant on every live question. Timken India paid its US parent USD 756,728.26 under an agreement of 2 August 2000 for management, system development, engineering and manufacturing services performed wholly in the United States, the compensation being confined to actual cost with no mark-up. The Authority held the sum was not a reimbursement of costs; that it was taxable as fees for technical services under article 12 of the India-US convention though the services were rendered abroad; that the absence of a profit element was irrelevant; and that no net-basis option could be read into section 44D. Withholding was required.
Pronounced by the Authority for Advance Rulings (Syed Shah Mohammed Quadri, J. (Chairman) and K. D. Singh, Member) on 2004-12-06, reported as [2005] 273 ITR 67 (AAR); (2005) 193 CTR (AAR) 610. It bears on section 195, section 9(1)(vii), section 44D, section 115A, section DTAA art 12 of the Income Tax Act 1961, in TDS Defaults and Residence & Treaty Benefit matters.
Reach for this one when the other side cites the reimbursement cases. It is the AAR's clearest statement that an element of profit is not essential for a receipt to be income: fees charged by a foreign company, even if pitched at its own cost, are quid pro quo for services and not a mere recovery. That is the answer most intra-group service charge arguments run into. The ruling also refuses to soften section 44D by reading in a net-basis option, distinguishing the Supreme Court's decision on section 44AC on the ground that section 44D treats all foreign companies alike and answers a real difficulty in verifying their expenses. The section 44D reasoning is now historical - section 44DA governs agreements made after 31 March 2003 - but the reimbursement holding is not.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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Timken India Ltd, the Indian subsidiary of the US-incorporated Timken Company, entered into an agreement dated 2 August 2000 under which Timken USA would provide management, system development, engineering and manufacturing services. All the services were performed in the United States. The agreement expressly provided that the compensation would cover only the actual costs incurred, with no mark-up and no profit element. Timken USA invoiced USD 756,728.26. Timken India remitted USD 145,610.62 and, before remitting the balance, sought an advance ruling. Its questions were whether the sum was taxable income in India so as to attract withholding under section 195(1); whether the India-US convention exempted it; whether the absence of any profit element took it outside the charge; whether, given that the sum would be taxed on a gross basis under sections 44D and 115A as fees for technical services, an option to compute on a net basis could be read in following the Supreme Court's decision in Union of India v. A. Sanyasi Rao; and whether tax already withheld of Rs 10,59,100 was refundable.
The Authority ruled against the applicant throughout. The entire sum could not be characterised as a recovery or reimbursement of costs, and was liable to tax in India, so withholding under section 195(1) was required. Under article 12 of the India-US convention the sum was taxable in India as fees for technical services notwithstanding that the services were rendered abroad, and withholding was required. The sum was taxable irrespective of whether any profit or income arose in Timken USA's hands. No option to compute income on a net basis could be read into section 44D, the principle in Sanyasi Rao having no application to it; tax was to be withheld at the appropriate rate under the Act or the convention, whichever was lower. The refund question was not pressed. The consequential additional question, whether withholding should be on net income only, did not survive.
The Authority's central proposition is that income does not require profit. Fees charged by a foreign company for services it has performed are the quid pro quo for those services; that the amount is pitched at the company's own cost affects its margin, not the character of the receipt. The Authority followed its own earlier ruling in Danfoss Industries (P) Ltd for that proposition and declined to treat the invoice as a reimbursement, noting that the agreement obliged Timken India to compensate its parent for the costs of the services rather than to refund an outlay the parent had made on Timken India's behalf. On section 44D the Authority refused to import the Supreme Court's reasoning in Sanyasi Rao. That case concerned section 44AC, and the vice it identified was unreasonable discrimination between similarly placed domestic traders. Section 44D treats all foreign companies uniformly, and it answers a genuine administrative difficulty - the near impossibility of verifying expenses incurred abroad by a foreign company. The Authority added that a non obstante clause excluding sections 28 to 43C does not by itself warrant reading an option into the section for the assessee's benefit. It also declined to follow Tribunal decisions that had read section 44D down, observing that only courts exercising constitutional jurisdiction may strike down or read down a statute and that Tribunals cannot arrogate that power to themselves.
The sum cannot be said to represent recovery or reimbursement of costs.
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Handle my notice → Ask a CA on WhatsAppYes. The Authority ruled against the applicant on every live question. Timken India paid its US parent USD 756,728.26 under an agreement of 2 August 2000 for management, system development, engineering and manufacturing services performed wholly in the United States, the compensation being confined to actual cost with no mark-up. The Authority held the sum was not a reimbursement of costs; that it was taxable as fees for technical services under article 12 of the India-US convention though the services were rendered abroad; that the absence of a profit element was irrelevant; and that no net-basis option could be read into section 44D. Withholding was required. This was decided by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman) and K. D. Singh, Member) and bears on section 195, section 9(1)(vii), section 44D, section 115A, section DTAA art 12 of the Income Tax Act 1961. It is reported as [2005] 273 ITR 67 (AAR); (2005) 193 CTR (AAR) 610. Reach for this one when the other side cites the reimbursement cases. It is the AAR's clearest statement that an element of profit is not essential for a receipt to be income: fees charged by a foreign company, even if pitched at its own cost, are quid pro quo for services and not a mere recovery. That is the answer most intra-group service charge arguments run into. The ruling also refuses to soften section 44D by reading in a net-basis option, distinguishing the Supreme Court's decision on section 44AC on the ground that section 44D treats all foreign companies alike and answers a real difficulty in verifying their expenses. The section 44D reasoning is now historical - section 44DA governs agreements made after 31 March 2003 - but the reimbursement holding is not. If it applies to you, the first step is this: Do not argue that a cost-only recharge is outside tax because there is no profit in it; on this reasoning that fails.
Timken India Ltd, the Indian subsidiary of the US-incorporated Timken Company, entered into an agreement dated 2 August 2000 under which Timken USA would provide management, system development, engineering and manufacturing services. All the services were performed in the United States. The agreement expressly provided that the compensation would cover only the actual costs incurred, with no mark-up and no profit element. Timken USA invoiced USD 756,728.26. Timken India remitted USD 145,610.62 and, before remitting the balance, sought an advance ruling. Its questions were whether the sum was taxable income in India so as to attract withholding under section 195(1); whether the India-US convention exempted it; whether the absence of any profit element took it outside the charge; whether, given that the sum would be taxed on a gross basis under sections 44D and 115A as fees for technical services, an option to compute on a net basis could be read in following the Supreme Court's decision in Union of India v. A. Sanyasi Rao; and whether tax already withheld of Rs 10,59,100 was refundable. The matter was decided on 2004-12-06 by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman) and K. D. Singh, Member). On those facts the Advance Ruling held as follows. The Authority ruled against the applicant throughout. The entire sum could not be characterised as a recovery or reimbursement of costs, and was liable to tax in India, so withholding under section 195(1) was required. Under article 12 of the India-US convention the sum was taxable in India as fees for technical services notwithstanding that the services were rendered abroad, and withholding was required. The sum was taxable irrespective of whether any profit or income arose in Timken USA's hands. No option to compute income on a net basis could be read into section 44D, the principle in Sanyasi Rao having no application to it; tax was to be withheld at the appropriate rate under the Act or the convention, whichever was lower. The refund question was not pressed. The consequential additional question, whether withholding should be on net income only, did not survive.
The Authority's central proposition is that income does not require profit. Fees charged by a foreign company for services it has performed are the quid pro quo for those services; that the amount is pitched at the company's own cost affects its margin, not the character of the receipt. The Authority followed its own earlier ruling in Danfoss Industries (P) Ltd for that proposition and declined to treat the invoice as a reimbursement, noting that the agreement obliged Timken India to compensate its parent for the costs of the services rather than to refund an outlay the parent had made on Timken India's behalf. On section 44D the Authority refused to import the Supreme Court's reasoning in Sanyasi Rao. That case concerned section 44AC, and the vice it identified was unreasonable discrimination between similarly placed domestic traders. Section 44D treats all foreign companies uniformly, and it answers a genuine administrative difficulty - the near impossibility of verifying expenses incurred abroad by a foreign company. The Authority added that a non obstante clause excluding sections 28 to 43C does not by itself warrant reading an option into the section for the assessee's benefit. It also declined to follow Tribunal decisions that had read section 44D down, observing that only courts exercising constitutional jurisdiction may strike down or read down a statute and that Tribunals cannot arrogate that power to themselves. In the words reproduced by the source cited on this page: "The sum cannot be said to represent recovery or reimbursement of costs."
It was decided by the Advance Ruling on 2004-12-06 and is reported as [2005] 273 ITR 67 (AAR); (2005) 193 CTR (AAR) 610. Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 195, section 9(1)(vii), section 44D, section 115A, section DTAA art 12, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Authority ruled against the applicant throughout. The entire sum could not be characterised as a recovery or reimbursement of costs, and was liable to tax in India, so withholding under section 195(1) was required. Under article 12 of the India-US convention the sum was taxable in India as fees for technical services notwithstanding that the services were rendered abroad, and withholding was required. The sum was taxable irrespective of whether any profit or income arose in Timken USA's hands. No option to compute income on a net basis could be read into section 44D, the principle in Sanyasi Rao having no application to it; tax was to be withheld at the appropriate rate under the Act or the convention, whichever was lower. The refund question was not pressed. The consequential additional question, whether withholding should be on net income only, did not survive. It arises in TDS Defaults and Residence & Treaty Benefit matters, on section 195, section 9(1)(vii), section 44D, section 115A, section DTAA art 12 of the Income Tax Act 1961, and was decided by Syed Shah Mohammed Quadri, J. (Chairman) and K. D. Singh, Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you want the reimbursement argument to work, show the payer bore its own cost directly and the foreign entity was only a conduit, with the underlying third-party invoices. Compute under section 44DA, not section 44D, for any agreement made after 31 March 2003. Withhold under section 195 and litigate afterwards, or apply under section 195(2), rather than deciding chargeability yourself.
Superseded by amendment. The computation limb is gone. Section 44DA was inserted by the Finance Act 2003 with effect from 1 April 2004 and governs royalties and fees for technical services under agreements made after 31 March 2003, so the section 44D gross-basis reasoning that answers questions 4 and (a) applies only to older agreements such as the one here, dated 2 August 2000. The chargeability limb has been reinforced rather than weakened: the Explanation below section 9(2) as it now stands deems income under section 9(1)(vii) to accrue in India whether or not the non-resident has a place of business here or has rendered services here, which is exactly the point the applicant lost on. No High Court or Supreme Court decision dealing with this ruling was found on Indian Kanoon. The Authority itself was replaced by the Board for Advance Rulings from 1 September 2021 (Finance Act 2021; Notification 96/2021), whose rulings are appealable to the High Court under section 245W, and the Income-tax Act 1961 was replaced by the Income-tax Act 2025 from 1 April 2026. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The note we were given calls this a ruling 'frequently reached for on the reimbursement-versus-FTS argument'. A reader should know it went against the taxpayer on every point: the Authority held the cost-only charge taxable and rejected the no-profit-element argument outright. It therefore cuts against, not for, the Decta line. The Danfoss Industries ruling the Authority relied on was not read. The reported citations are taken from the Indian Kanoon text. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority ruled against the applicant throughout. The entire sum could not be characterised as a recovery or reimbursement of costs, and was liable to tax in India, so withholding under section 195(1) was required. Under article 12 of the India-US convention the sum was taxable in India as fees for technical services notwithstanding that the services were rendered abroad, and withholding was required. The sum was taxable irrespective of whether any profit or income arose in Timken USA's hands. No option to compute income on a net basis could be read into section 44D, the principle in Sanyasi Rao having no application to it; tax was to be withheld at the appropriate rate under the Act or the convention, whichever was lower. The refund question was not pressed. The consequential additional question, whether withholding should be on net income only, did not survive.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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