TDS on reimbursement cost to Foreign Holding company

[Sai Prasad]

Should we deduct TDS for reimbursement of AWS Cost incurred by the holding company on behalf of the Indian subsidiary?

It is cross charged to Subsidiary on Cost tocost basis (without any Mark-up)

[YAGAY andSUN]

In most cases, TDS (Tax Deducted at Source) is not required to be deducted on a pure reimbursement of expenses, provided the following conditions are met and well-documented:

✅ Conditions Where TDS Is Not Applicable:

1. Pure Reimbursement:
   • The Indian subsidiary is simply reimbursing the exact AWS cost incurred by the holding company, without markup or profit.
2. Invoice & Agreement Clarity:
   • The original AWS invoice should clearly be in the name of the Indian subsidiary (or at least show usage attributable to it).
   • A proper inter-company agreement should exist stating the reimbursement nature and cost-to-cost recovery.
3. No Services Rendered:
   • The holding company is not providing any service or adding value — only paying on behalf of the subsidiary.
4. No Withholding Tax in Nature:
   • The expense being reimbursed (AWS) is not itself subject to withholding tax in India. AWS typically provides cloud services, which may fall under Royalty / FTS (Fees for Technical Services) under Indian tax law if paid directly to AWS by an Indian entity.

⚠️ When TDS May Be Applicable:

1. If the AWS invoice is in the name of the holding company and not the Indian subsidiary, the Indian tax authorities may view it as a service provided by the holding company to the subsidiary — making it liable for TDS under Section 195.
2. If there is any markup or fee added (even administrative), then it becomes a service transaction, and TDS applies.
3. If the AWS payment would have attracted TDS (e.g., if the Indian subsidiary paid AWS directly), then the reimbursement may still attract TDS, unless exemption is obtained or tax treaty benefits are applied properly.

💡 Recommended Action:

• Maintain strong documentation, including:
  • Inter-company agreement
  • Breakdown of cost (no markup confirmation)
  • Original AWS invoices
  • Proof that services were for the Indian subsidiary
  • Consider obtaining a CA Certificate or tax advisor opinion to support the non-deduction of TDS.

[Sai Prasad]

Thanks for the detailed reply.

In our case, the invoice is raised by AWS (a foreign vendor) in the name of our foreign holding company, which is for combined US and Indian clients.

Could you please confirm what our approach should be? 

[YAGAY andSUN]

Based on the Modified facts you've provided, here's a structured legal and tax analysis of the TDS implications on the reimbursement of AWS cost by the Indian subsidiary to its foreign holding company, especially where:

The AWS invoice is in the name of the foreign holding company,

The cost is cross-charged on a cost-to-cost basis, and

The services cover both U.S. and Indian clients.

✅ Key Issue:

Whether TDS is required under Section 195 of the Income Tax Act, 1961, when the Indian subsidiary reimburses AWS expenses (incurred by the foreign holding company) without markup.

🔍 Detailed Analysis

1. Principle of “Pure Reimbursement” under Indian Tax Law

For a payment to qualify as a pure reimbursement (and thus escape TDS), the following conditions must all be met:

Criteria	Status in Your Case
Invoice in name of Indian entity	❌ No — AWS invoice is in name of foreign holding company
No markup charged	✅ Yes — cost-to-cost reimbursement
No independent service rendered	⚠️ Ambiguous — Indian tax authorities may perceive “paying on behalf” as service unless usage is segregated
Benefit or usage attributed solely to Indian subsidiary	⚠️ Partially — services are shared with U.S. clients

🔴 Risk Exposure

In your case, TDS is likely to be applicable for the following reasons:

Invoice is not in the name of the Indian subsidiary: This breaks the "pure reimbursement" chain.

Combined usage (U.S. + Indian clients): Unless detailed usage records are maintained, the allocation of costs may not appear transparent or arm’s length.

Indian tax authorities may interpret the arrangement as the foreign holding company rendering a composite cloud service to the Indian entity, particularly when the AWS services themselves could fall within:

“Royalty” under Explanation 2 to Section 9(1)(vi), or

“Fees for Technical Services (FTS)” under Section 9(1)(vii), read with applicable DTAA.

📌 Key case law:

CIT v. Dunlop Rubber Co. Ltd. [1982 (2) TMI 24 - CALCUTTA HIGH COURT]: Emphasized substance over form in interpreting transactions.

CIT v. Siemens Aktiongesellschaft [2008 (11) TMI 74 - BOMBAY HIGH COURT]: Clarified that reimbursement without any service component or profit margin can be excluded from tax deduction, but only where backed by strong evidence.

💡 Recommended Approach

Given the above, here is the legally compliant and practical approach:

✅ 1. Withhold TDS on the reimbursement

Unless:

You can demonstrate exact segregation of Indian usage, and

You obtain prior documentation (e.g., CA certificate or lower/NIL withholding order under Section 195(2) from the AO).

✅ 2. Break out the AWS usage in future arrangements

Ensure AWS invoices are split or tagged by client geography or business unit, and

Have AWS raise the invoice directly to the Indian subsidiary for Indian usage.

✅ 3. Documentation Required

Maintain a robust audit trail:

Inter-company agreement specifying cost-sharing and reimbursement terms

Usage logs showing allocation of AWS costs to Indian operations

Proof of no markup

Foreign holding company's invoice to the Indian entity

Opinion from a tax advisor or CA to justify TDS position

📘 Conclusion

In your present scenario, TDS is likely applicable under Section 195 of the Income Tax Act, 1961, since:

The AWS invoice is not in the Indian entity’s name, and

There is no clear segregation of Indian usage.

Unless proven otherwise, the reimbursement may be viewed as payment for a service or royalty, attracting TDS. Non-deduction may trigger disallowance under Section 40(a)(i) and liability under Section 201.

*** 

[Sai Prasad]

Thanks. Your analysis & insights are pretty clear on the point.

Suppose if we proceed as below :

1. Indian entity will deduct TDS and remit it to the government. (Please suggest rate.)

2. Subsequently, if the US entity files an ITR in India, can it claim the TDS deposited?

(Not sure if US entity need to offer the AWS amount received from Indian subsidiary as income for tax computation.)

  

[YAGAY andSUN]

Please discuss it with your CA with all material facts.

AI Summary

Cloud Service Cost Reimbursement Triggers Complex Tax Withholding Scenario for Multinational Entities Under Cross-Charging Arrangements A discussion forum explored tax deduction (TDS) implications for cloud service (AWS) reimbursement between a foreign holding company and its Indian subsidiary. The key issue centered on whether TDS is required when expenses are cross-charged without markup. The analysis suggested potential TDS liability due to invoice complexities, combined client usage, and lack of clear cost segregation. Recommended actions include maintaining detailed documentation, potentially withholding TDS, and ensuring future invoices clearly attribute costs to specific entities.