Software Cost Recharge from US Company to Indian Subsidiary

Hi Mohit,

Here’s a detailed answer to your query regarding software cost recharge from a US parent (LLC) to its Indian subsidiary:

1) Tax on Such Recharge

• When the US parent company recharges software licensing costs to Indian subsidiary, it is essentially a reimbursement or recharge of expenses.

• The tax treatment depends on whether the recharge is on actual cost basis or with markup/profit:

  • If pure reimbursement (no markup):

    • Generally, this is not treated as income for the US company, but merely a cost pass-through.

    • GST on the recharge may be applicable on the Indian side if software usage is within India (depends on supply location & nature).

    • No TDS in India on pure reimbursement if no services rendered by the US entity to India (just cost pass-through).

  • If recharge includes markup or service component:

    • It will be treated as income for the US company and could be subject to:

      • Tax Deducted at Source (TDS) under Indian law (Section 195 of the Income Tax Act).

      • Transfer Pricing regulations would apply to ensure the transaction is at arm’s length.

• Nature of Software License:

  • Software licenses (like MS Office, SAP) are intangible goods or services.

  • Under GST, software supply is a service; ITAT has held software licenses are service in nature.

  • The Indian subsidiary should ensure correct GST treatment on these recharges.

2) Specific Guidelines to be Followed

• Transfer Pricing Compliance:

  • The Indian subsidiary and US parent must follow Transfer Pricing regulations to ensure recharge prices are at arm's length.

  • Maintain documentation for cost allocation and method of recharge.

• Documentation:

  • Maintain detailed invoices specifying the basis of recharge (actual cost, no profit, etc.).

  • Intercompany agreements should clearly define recharge terms.

• GST Compliance:

  • The Indian subsidiary needs to determine whether to pay GST on the recharge.

  • Generally, intra-group software license recharge attracts GST at 18% (for software services).

• TDS Considerations:

  • If recharge includes profit margin, TDS under section 195 on fees for technical services or royalty might apply.

  • If purely reimbursement, no TDS is required.

• Foreign Exchange Regulations:

  • Payments should comply with FEMA regulations in India.

  • RBI guidelines on payment for software and licenses must be followed.

3) Conditions for US LLC and Indian Subsidiary to be Eligible for Interpretation

Assuming you meant "interpretation" as "applicability of Double Tax Avoidance Agreement (DTAA)" or tax treaty benefits, here are the conditions:

• Tax Residency:

  • Both entities must be resident in their respective countries (US and India).

  • US LLC's classification matters: If treated as partnership or disregarded entity in US tax law, Indian tax authorities may treat it differently.

• Nature of Payment:

  • If payment is for royalty or technical services, DTAA provisions on these may apply.

• Permanent Establishment (PE):

  • US LLC should not have PE in India related to this recharge.

• Certificate of Residence:

  • US company must provide Tax Residency Certificate (TRC) to avail DTAA benefits.

• Beneficial Ownership:

  • The US LLC should be the beneficial owner of the income to claim treaty benefits.

• Avoidance of Double Taxation:

  • Under India-US DTAA, royalties and fees for technical services can be taxed in India but at reduced rates.

  • Proper TDS rates as per DTAA should be applied after submission of TRC and Form 10F.

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