Reimbursement of pre-incorporation expense - TDS?

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vasudevan (Querist)

15 December 2009 US Company is the holding company which set-up a subsidiary company in India and incurrs all pre-incorporation related expenses.

Now, when the subsidiary company REIMBURSES the pre-incorporation expense to the holding co, should it deduct tax u/s 195.

Any case law reference?

M Prabhakar Menon

M Prabhakar Menon (Expert)

16 December 2009 Tds provisions does not include reimbursements

vasudevan

vasudevan (Querist)

17 December 2009 No...in certain case, even reimbursement partakes the character of the actual expenses.

Any input on recent karnataka HC in the case of Samsung Electronics....any remedy?

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

20 July 2025 This is a highly relevant query, especially in the context of Section 195 of the Income Tax Act, 1961, which deals with TDS on payments to non-residents. Let’s break it down clearly and address your scenario regarding reimbursement of pre-incorporation expenses by an Indian subsidiary to a US holding company.

🔍 Key Question:
When an Indian subsidiary reimburses pre-incorporation expenses to its US holding company, is TDS under Section 195 applicable on that reimbursement?
🔹 1. General Rule under Section 195:

Section 195 requires withholding tax on any sum chargeable to tax in India paid to a non-resident.
The key test is:
👉 Is the sum “chargeable to tax” under the provisions of the Act?
🔹 2. Nature of Reimbursement:

If the reimbursement is purely cost-based (i.e., actual expenses with no profit element, no markup), and
The expenses are supported by documentary evidence, and
The expenses are not in the nature of income or fees for technical services (FTS) or royalty under Section 9 of the Income Tax Act or Article of relevant DTAA,
✅ Then, such pure reimbursements are not chargeable to tax, and hence no TDS under Section 195 is applicable.

BUT...

🔹 3. If reimbursement has service element / profit / FTS character:

❌ Then TDS must be deducted under Section 195.

E.g., if the holding company had:

Rendered services related to incorporation (e.g., consultancy, legal support, setup advisory), or
Charged for manpower/technical assistance
👉 Then the reimbursement partakes the character of income (specifically Fees for Technical Services under Section 9(1)(vii)) and TDS is required.

🔹 4. Case Law Reference:

📌 CIT vs. Samsung Electronics Co. Ltd. (2009) — Karnataka High Court
The court ruled that even payments to non-residents (without income element) require prior determination under Section 195(2) if the payer thinks it’s not taxable.
So, even reimbursements might attract TDS unless AO decides otherwise.
👉 Therefore, if there's any ambiguity about whether the reimbursement contains a chargeable element, the Indian company must approach the Assessing Officer under Section 195(2) to avoid liability.

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