Reimbursement of cost will be taxable as FTS in absence of evidence of actual cost-allocation & its incurrence

While partly allowing the appeal filed by the Assessee, The Mumbai Bench of Income Tax Appellate Tribunal confirms additions for cost reimbursement as fees for technical services (FTS) in the hands of Kraft Foods Group Brands LLC (Assessee) received from the affiliates for provision of various services.

A Division Judge Bench of Justice Aby T. Varkey and Accountant Member S. Rifaur Rahman observed that” The collection of charges shows that it collected on a gross basis or on a certain basis without adopting a proper method of accounting as agreed in the agreement. When there is no basis of allocation or actual cost incurred for affiliates, it shows that the claim of the assessee is gross and there is no document to support this claim”.

“The assessee has entered into a support services agreement to provide support services through the various cost centers but failed to submit any details or proper factors or allocations basis to classify the various support service charges provided/collected from the various affiliates, in particular, Heinz India”, added the Bench. 

Advocate M.P. Lohia appeared for the Assessee whereas Advocate Anil Sant appeared for the Revenue.

The brief facts of the case were that the Assessee was a US tax resident, and received Rs.5.18 Cr towards cost allocation i.e., recovery of expenses from Heinz India which was not offered to tax as it was pure reimbursement without any markup. Revenue rejected the claim as no documentary evidence was submitted for cost allocation and observed that the services provided are technical in nature and also satisfy the ‘make available’ clause, thus, taxable as FTS. The services provided were in the areas of general management, internal audit, communication, human resources, finance and treasury, data processing and information technology, food safety and quality control, supply chain and manufacturing business development, and other related areas. The Assessee approached the DRP but even after the clear direction of Ld. DRP, the Assessing Officer proceeded to sustain the addition with the observation that Form 26AS captures the transactions on which TDS was deducted. Hence, the Assessee approached the Bench. 

After considering the submission, the Bench noted that the Assessee raised a single invoice for all the costs incurred by different cost centres but based on the support service agreement, the Assessee was required to determine each allocable cost by adopting an allocation factor.

The Bench also noted that a markup of 0% was to be applied to costs of performing support services unless a different markup is required under the US TP Rules, however, finds that the Assessee did not bring on record the relevant assessment made under the US TP Rules.

The Bench remarked that remarks that merely because the parties agreed that a mark-up of 0% shall be applied to the cost of support services does not mean anything unless and until proper supporting documents are submitted explaining how the costs are incurred on behalf of affiliates and how it is to be considered as reimbursement and hence, there cannot be any presumption as to reimbursement.

The Bench opined that first the Assessee has to prove that the cost allocations are falling under the category of reimbursement and then only they can claim the same as exempt under income tax or under treaty which was not done in the instant case.

The Bench stated that the Assessee did not even bother to submit any details of cost allocation by the respective cost centers and relevant cost factors for allocation.

The ITAT also stated that the agreement explains that the annual invoice amount will be determined by reference to the company’s actual cost incurred prior to the preparation of the cost allocation exercise which shows that the charges for support services are only determined based on the respective cost centres’ cost allocation.

The Bench further mentioned that there is no supporting evidence to appreciate that Assessee has recovered the above-said expenses from Heinz India and that it has incurred various expenditures on behalf of them.

The Bench expressed that the Assessee has collected consolidated support service charges and offered to tax a portion i.e., about 41%, and the rest as reimbursement of allocated cost without submitting any supporting evidence.

The ITAT found that the collection of charges shows that they were collected on a gross basis or on a certain basis without adopting the proper method of accounting as agreed in the agreement.

The Bench stated that without the classification and basis, the Assessee partly claimed the support services as chargeable to tax and balance not chargeable. The Bench highlighted that Assessee also offered to tax Rs.3.63 Cr. received from Heinz India towards support services on which tax of Rs.93.55 Lac was deducted.

The ITAT also highlighted that during an assessment, the Assessee submitted that it inadvertently declared net amount instead of gross, hence offered tax on a differential of Rs. 93.55 Lacs but later withdrew this submission and Revenue made an addition of Rs.93.55 lacs as per the original submission.

On considering that DRP gave directions to the AO for verification of Form 26AS with the return filed, the Bench came to the conclusion that the income declared in return and the receipts in Form 26AS were matching and thus, deleted the addition.

Cause Title: Kraft Foods Group Brands LLC Vs. ACIT [ITA NO. 2495/MUM/2022 / 2023-Enterslice-45-ITAT-Mum]

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