Internal reimbursement between project office and head office is not taxable income when paid at actual cost without markup.

A cost-to-cost reimbursement of staff salary paid by a project office to its head office, without any markup, was treated as an internal transfer within the same enterprise and not as separate income. The ITAT applied the principle that a permanent establishment and its head office are parts of one entity, so a payment between them is a payment to self and does not create an independent taxable stream. As the assessee had already offered its receipts to tax under section 44DA and the reimbursement represented actual staff cost only, the amount was not taxable as fee for technical services and the addition was deleted.

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Issues: Whether reimbursement of salary costs paid by the project office to the head office, without any markup, could be taxed in the hands of the head office as fee for technical services, or whether it was merely an internal payment to self and therefore not chargeable to tax.

Analysis: The assessee's receipts were already offered to tax under section 44DA of the Income-tax Act, 1961, and the disputed amount represented reimbursement of actual staff cost paid from the project office to the head office on a cost-to-cost basis. The Tribunal accepted the principle that a permanent establishment and its head office form parts of the same enterprise, so a transfer between them does not create a separate stream of income. Following the Special Bench view that a payment by a branch to its head office is a payment to self, the Tribunal held that such reimbursement cannot be characterised as independent taxable income in the hands of the head office.

Conclusion: The amount of Rs. 4,59,28,842 paid as reimbursement of staff salary to the head office was not taxable as fee for technical services, and the addition was deleted.

Final Conclusion: The assessee's appeals were allowed because the intra-entity reimbursement between the project office and the head office did not give rise to taxable income.

Ratio Decidendi: A reimbursement made on actual cost by a permanent establishment to its head office, being an internal transfer within the same enterprise and not involving any markup or independent income accrual, cannot be taxed as separate income.

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