Taxability of sharing of costs or reimbursements between related/distinct persons – Drawing Parallels Between Income-tax and GST

One of the recurring controversies in tax law is whether a mere reimbursement of expenses can itself be subjected to tax. Under the Income-tax framework, courts and tribunals have consistently held that where payments are purely cost-to-cost, without any markup and without any underlying service rendered, cannot be regarded as income in the hands of the person receiving the said reimbursement. The recent decision of the ITAT Mumbai in Dy. Commissioner of Income Tax (IT) -2 (2) (2), Mumbai Versus Iss As, Denmark And (Vice-Versa) - 2025 (8) TMI 948 - ITAT MUMBAIis another reaffirmation of this principle. The Tribunal found that reimbursements supported by third-party invoices and without any profit element could not be taxed as income in India.

This immediately sparks a question under GST: can the deeming fiction under Schedule I—which taxes transactions between distinct or related persons even without consideration—be stretched so far as to tax reimbursements where no supply of service exists? The ITAT ruling provides a timely backdrop to examine whether GST can, or should, override the fundamental principle that “no service means no tax.”

Let us examine the ITAT ruling and see how the principles it lays, be applied in the GST context.

Factual Background

The assessee, a company incorporated in Denmark, received Rs.3.89 crore from its Indian Associated Eenterprise (ISS India) as reimbursement of expenses incurred towards legal and professional services obtained from third parties (notably Kroll Associates India Pvt. Ltd.). The assessee claimed these were pure reimbursements without markup, incurred on behalf of the Associated enterprise (AE).

• The Assessing Officer (AO) held that the payments were in the nature of legal and professional services and taxable as “Royalty/Management Fee” under Article 13 of the India–Denmark DTAA, and added the amount to income.
• On appeal, the CIT(A) deleted the addition, observing that the TPO had accepted the transaction as being at arm’s length in the hands of the Indian AE and therefore no adjustment should arise in the hands of the non-resident.

Issue

Whether reimbursements received by the assessee from its Indian AE, without markup and supported by third-party invoices, can be taxed in India as income/fees for technical services under Article 13 of the India–Denmark DTAA.

Decision

The Tribunal confirmed that the receipts were in the nature of pure reimbursements and not taxable as income:

• It noted that the AO himself had recorded that the payments were without any markup and that the actual legal and professional services were rendered by Kroll Associates India Pvt. Ltd., a third party, not by the assessee.
• The assessee had merely acted as a pass-through, recovering costs it had incurred on behalf of its Indian AE.
• The supporting invoices from Kroll matched the amounts recovered, demonstrating that the assessee had not retained any margin or profit element.
• Following the Supreme Court’s ruling in A.P. Moller Maersk A/S (2017), once a receipt is established as a reimbursement on cost-to-cost basis, it loses the character of income, since there is no service provision by the recipient and no benefit flowing from it.

In the GST context

Under GST, supply is liable to tax. Supply is defined to include sale, barter, exchange, etc. of goods and/or services. Thereby clearly bringing out that existence of goods and/or services is important for levying tax.

However, for the transactions between related/distinct persons, we have seen that the GST department goes to an extent of taxing transactions which are in the nature of sharing of expenses. It could be a case where a company in the group incurs certain cost for the entire group. This may be a insurance cover taken for all employees of the group or rental expenses incurred centrally or services of any other professional taken for the group as a whole.

In such a situation, the company that appoints the service provider pays the entire cost and gets reimbursement from the other entities in the group, their share of expenses.

Going by the principle laid down under the Income Tax law by the Supreme Court earlier and followed by the ITAT, in case of reimbursements backed by 3rd party invoices, there can be no service provision and hence there should be no GST liability as well.

In the indirect tax context as well, there have been decisions under the erstwhile laws which have dealt with the similar issue, i.e. whether mere reimbursement of expenses would be considered as a service and thereby liable to service tax.

The Supreme Court in the case of Gujarat State Fertilizers & Chemicals Ltd.^[1] with reference to the levy under the service tax regime, held that mere sharing of expenses between two persons would not be considered as provision of service by one person to another. Specifically, the Supreme Court had held as follows

“GSFC and GACL are public sector undertakings, as already mentioned above. Since HCN is to be received through pipeline, it is abundantly clear that in order to save the expenditure, both the parties agreed that there should be a common pipeline. Once HCN is received through the said common pipeline, it comes first to GSFC’s premises and from there it is diverted in the ratio of 60 : 40, meaning thereby that GSFC receives 60% of the HCN whereas GACL receives 40% of the supply in accordance with their respective requirement. To enable GACL to receive this HCN through common pipeline, arrangement/agreement was entered into between these two parties. For this purpose, handling facilities were installed in the premises of GSFC. However, fact remains, for which there is no dispute, that for installation of these facilities both the parties had contributed towards the investment. Since the said handling facilities are in the premises of GSFC, incineration also takes place at the said premises. Handling facilities expenditure thereof is shared equally by both the parties. That is clearly provided in the agreement/arrangement that was agreed to between the parties and is reflected in the Minutes dated 6-7-1980. Once these facts are accepted, we find that handling portion and maintenance including incineration facilities is in the nature of joint venture between two of them and the parties have simply agreed to share the expenditure. The payment which is made by GACL to GSFC is the share of GACL which is payable to GSFC. By no stretch of imagination, it can be treated as common ‘service’ provided by GSFC to GACL for which it is charging GACL.”

Some of the other judicial precedents under the Service Tax regime which have held that mere sharing of cost would not result in service, are as follows

1. Historic Resort Hotels (Pvt.) Ltd.^[2] 
2. Reliance ADA Group Pvt. Ltd.^[3]
3. Glaxo Smithkline Pharmaceuticals Ltd.^[4]

On similar lines, even in the case of revenue sharing arrangements between two persons, the courts have consistently taken the view that sharing of profits between two persons from a common activity would not amount to service. The Hon’ble Supreme Court in the case of Commissioner Versus Mormugao Port Trust - 2018 (10) TMI 1675 - SUPREME COURT affirmed the decision of the Tribunal that the amount received as royalty was not consideration for rendition of any services but in fact was the assessee’s share of revenue arising out of joint venture. Therefore, the appellant is not liable to pay tax as there is no service that has been rendered by the Appellant, much less the taxable service of renting of immovable property. Money flow under nomenclature of Royalty, not consideration for rendition of any services but in fact represents assessee’s share of revenue arising out of Joint Venture.

The Service Tax Education Guide at para 2.4.3 has clarified that the profit-sharing arrangements are liable to service tax. A similar view was provided in Board Circular No. 179/5/2014-ST, dated 24.09.2014. In a nutshell, the Departments view is that parties to the joint venture are liable to ST on the shares received by them towards taxable services provided by them to the JV. However, circulars which are not in accordance with the law are void-ab-initio and non-existent – decision of the larger bench of the Hon’ble Supreme Court in the case of Ratan Melting Wire Industries ^[5].

Also, while holding that levy of GST on amounts collected from members by clubs and associations is unconstitutional, the Kerala High Court in the case of Indian Medical Association,^[6] was interpreting the term ‘service’ and held that, this phrase as understood under the Constitution cannot be statutorily expanded by any legislature since the power to legislate is itself one that is conferred by the Constitution. In this backdrop, one can say that reimbursement of expenses is generally not understood to be regarded as a supply of services, (in line with Supreme Court’s decision in the Income Tax context). Hence, on the same grounds as held in the case of Indian Medical Association, any attempt to levy GST on reimbursement of expenses can be regarded as being unconstitutional.

Hence, the primary test to be satisfied for levying GST would be the existence of a service element in the transaction and not merely transfer of funds between two parties. One would have to carefully evaluate whether the arrangement between two parties is merely to incur an expense on behalf of the other, or it is something beyond which incorporates an element of service.  

Thereby,  it is suggested that suitable clauses are incorporated in the agreements that are entered for sharing of expenses (whether between Indian entities or cases which also involve entities abroad – which would have RCM implications) that would support the assessee/Company’s stand in future litigation.

The views expressed are strictly personal and cannot be regarded as an opinion. For any queries or feedback please write to [email protected] or [email protected]

^[1]M/s Gujarat State Fertilizers & Chemicals Ltd. & Another Versus Commissioner of Central Excise - 2016 (12) TMI 103 - Supreme Court

^[2] M/s Historic Resort Hotels (Pvt.) Ltd. Versus CCE, Jaipur – II - 2017 (9) TMI 1066 - CESTAT NEW DELHI

^[3]Reliance ADA Group Pvt Ltd Versus Commissioner of Service Tax, Mumbai-IV - 2016 (3) TMI 810 - CESTAT MUMBAI

^[4]M/s GLAXO SMITHKLINE PHARMACEUTICALS LTD Versus COMMISSIONER OF SERVICE TAX, MUMBAI-I - 2013 (9) TMI 710 - CESTAT MUMBAI

^[5]  COMMISSIONER OF CENTRAL EXCISE, BOLPUR Versus M/s RATAN MELTING & WIRE INDUSTRIES - 2008 (10) TMI 5 - Supreme Court

^[6] Indian Medical Association, Kerala Versus Union Of India, State Of Kerala, GST Council, Additional Director General, Directorate General Of Gst Intelligence, Kochi, Deputy Director, Directorate General Of GST Intelligence, Kozhikode (Vice Versa). - 2025 (4) TMI 872 - KERALA HIGH COURT