No Basis Of Allocation Or Actual Cost Incurred For Affiliates: ITAT Confirms Additions For Cost Reimbursement As FTS

The Mumbai Bench of Income Tax Appellate Tribunal, while confirming the additions for cost reimbursement as fees for technical services (FTS), noted that the assessee had no basis of allocation or actual cost incurred for affiliates.

The bench of Aby T. Varkey (Judicial Member) and S. Rifaur Rahman (Accountant Member) has observed that 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 or collected from the various affiliates.

The appellant/assessee, a US tax resident, received Rs. 5.18 crore from Heinz India for cost allocation, or the recovery of expenses, which was not subject to tax because it was an entirely markdown-free reimbursement.

The department denied the claim because no supporting documentation for cost allocation was provided, noting that the services were technical in nature and satisfied the "make available" requirement, making them taxable as FTS.

Services were offered in supply chain and manufacturing business development, general management, internal audit, communication, human resources, finance and treasury, data processing and information technology, food safety and quality control, and other related fields.

The tribunal noted that the assessee has to prove that the cost allocations fall under the category of reimbursement, and then only they can claim them as exempt under income tax or under treaty, which was not done. The assessee raised a single invoice for all the costs incurred by different cost centers, but based on the support service agreement, the assessee was required to determine each allocable cost by adopting an allocation factor.

The tribunal, while upholding the findings of the department, ruled that the assessee has provided services to its affiliates in India, partly claiming them as chargeable to tax and the balance not chargeable without any basis. 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. When there is no basis for allocation or actual cost incurred by affiliates, it shows that the claim of the assessee is gross and there is no document to support the claim.

Counsel For Appellant: M.P. Lohia

Counsel For Respondent: Anil Sant

Case Title: Kraft Foods Group Brands Versus ACIT (International Taxation)

Case No.: ITA NO. 2495/MUM/2022

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