Tax on Reimbursement from Client

[Shrey Shah]

Hi, please guide on the below.

I provide IT services to a client outside India and I declare my income under Section 44ADA in my ITR.

The client asked me to purchase some assets from India like Laptop, Screen, etc. on their behalf to get the work done. They reimbursed the entire amount to me.

Although, in future, whenever the contract ends, I’ll have to return back all the assets I purchased to the client as they own it. The same clause is written in my contract as well.

In this case, do I still have to consider the reimbursed amount as an income and get it classified as taxable OR will this be a pure reimbursement and should NOT be taxable as the assets are owned by the client itself and not me?

[Ryan Vaz]

Applicable Law / Judicial & Statutory Basis

1. Section 4 & Section 5 – Income-tax Act, 1961
   Tax is chargeable only on “income”. A pure reimbursement without profit element is not income.

2. Section 28 – Profits and Gains of Business or Profession
   Only receipts having the character of income are taxable.

3. Section 44ADA – Presumptive taxation for specified professionals

   • Presumptive income = 50% of gross receipts

   • “Gross receipts” must be receipts arising from rendering professional services, not capital advances or reimbursements.

4. CBDT Circular No. 715 dated 08-08-1995 (Q.30)
   Clarifies that pure reimbursements, with no markup or profit element, do not form part of income.

5. Judicial Principle (consistent case law)
   Courts have repeatedly held that reimbursement of actual expenses incurred on behalf of the client, supported by evidence and with no element of profit, is not taxable income (e.g., CIT v. Siemens Aktiongesellschaft - 2008 (11) TMI 74 - BOMBAY HIGH COURT, Bombay HC).

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Short Practical Answer

? No, the reimbursed amount should NOT be treated as taxable income, provided it is a pure reimbursement and not part of your professional fee, and the ownership of assets vests with the client.

Accordingly, such reimbursement should also be excluded from “gross receipts” for Section 44ADA.

AI Summary

Pure reimbursement not taxable: reimbursements without profit and with client ownership excluded from professional gross receipts. Pure reimbursements received for assets purchased on a client's behalf, where ownership vests with the client and there is no profit element, are not taxable and should be excluded from gross receipts for presumptive taxation; treatment requires documentary evidence and contract terms showing client ownership and absence of markup.