Introduction
The Bangalore Bench of the Income-tax Appellate Tribunal (ITAT), in Kohler Co. v. DCIT (ITA No. 185/Bang/2025), delivered a significant ruling for foreign enterprises receiving cross-charge reimbursements from Indian group entities. The assessee, Kohler Co., is a company incorporated in the United States of America and a tax resident of the USA. It is the ultimate holding company of the Kohler Group, engaged in the manufacture of kitchen and bath products, engines, power generation systems, cabinetry, tiles, and home interiors.
The dispute arose out of an Assessment Order dated 23 November 2022, passed under section 143(3) read with section 144C(3) of the Income-tax Act, 1961. The Assessing Officer made a sole addition of ₹3,94,78,124 on account of amounts received by the assessee from its Indian associated enterprises, Kohler Power India Pvt. Ltd. and Kohler India Corporation Pvt. Ltd. The addition was originally framed as fees for technical/managerial services. The Commissioner of Income-tax (Appeals)–12, Bengaluru, confirmed the addition, but on a different footing: the existence of a service permanent establishment under the India-USA Double Taxation Avoidance Agreement. The ITAT, however, set aside both the orders and directed deletion of the addition.
This commentary examines the factual matrix, the reasoning of the Tribunal, and the implications for cross-border cost recharge arrangements.
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Facts
For Assessment Year 2020-21, the assessee filed its return of income on 12 February 2021 declaring total income of ₹31,93,97,020. A revised return was filed on 25 May 2021. The return was selected for scrutiny, and notice under section 143(2) was issued.
During the assessment proceedings, the Assessing Officer sought to tax ₹39,478,124 received by the assessee from its Indian associated enterprises. The assessee explained that it had incurred certain expenses on behalf of its Indian group entities and had cross-charged those expenses on a cost-to-cost basis without any profit element. The reimbursements primarily related to insurance costs, business promotion expenses, legal and professional charges, travel expenses, and similar items. The assessee contended that reimbursement of expenses cannot be taxed in the hands of the recipient as income, and that no amount had been received in excess of the expenses incurred. Reliance was also placed on the “make available” clause under Article 12 of the India-USA DTAA.
The Assessing Officer rejected these submissions. He held that the assessee was performing managerial functions by centrally planning various services, the cost of which was later charged to Indian entities. Since the India-USA DTAA definition of “fees for included services” did not refer to managerial services, the Assessing Officer applied the domestic law provision under which fees for technical services includes managerial services. The sum of ₹39,478,124 was added to the assessee’s total income, and the total income was assessed at ₹35,88,75,144.
Before the CIT(A), the assessee reiterated that the receipts were mere reimbursements. The CIT(A), however, dismissed the appeal. He held that the receipts were taxable under domestic law, relying on Explanation 2 to section 9 of the Act. He further held that since the services were not covered under Article 12 of the DTAA as “included services,” they fell within Article 7 relating to business profits. He then concluded that a service PE existed because the services were furnished for more than 90 days in a 12-month period and were rendered through the employees or other personnel of the assessee.
Aggrieved, the assessee approached the ITAT.
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Reasoning
The ITAT’s reasoning is important because it restores the distinction between a pure reimbursement of expenses and taxable income.
1. Pure cost-to-cost reimbursement does not generate taxable income
The Tribunal analysed the transaction in detail and found that the payments received by the assessee from the Indian associated enterprises were not consideration for any independent service rendered by Kohler Co. to the Indian entities. Instead, the Indian associated enterprises had obtained certain services—such as advertisement and promotion, legal and professional services, and similar facilities—from third-party vendors in the USA. The assessee merely facilitated the payment to those third-party vendors and was subsequently reimbursed by the Indian entities.
The factual paper book filed before the Tribunal demonstrated that the reimbursement was supported by back-to-back invoices and a breakup of expenses. The Tribunal found that the assessee did not receive any amount in excess of the expenses incurred by it. Accordingly, the amount was a pure cross-charge on a cost-to-cost basis without any mark-up. Such a receipt cannot be treated as income accruing to the assessee, because there is no element of profit or gain embedded in the transaction. This finding was fundamental: if there is no income, no taxing provision—whether under the Act or the DTAA—can be invoked.
2. Service PE conditions must be cumulatively satisfied
The CIT(A) had confirmed taxability by holding that the assessee had a service PE under Article 5(2)(l) of the India-USA DTAA. The ITAT corrected this approach by holding that all the conditions for a service PE must be cumulatively satisfied.
For a service PE to arise under the India-USA DTAA, the enterprise must furnish or perform services within India through employees or other personnel of the enterprise, and those services must continue within India for a specified period—relevantly, more than 90 days in a 12-month period. The Tribunal found that none of these conditions were satisfied on the facts.
First, the services were rendered remotely from outside India. The actual service providers were third-party vendors in the USA, not the employees or personnel of Kohler Co. The assessee’s role was limited to making payments and getting reimbursed. Second, no employee or other personnel of the assessee visited India during the relevant year for rendering any of the services in question or for performing any business function on behalf of the assessee. Third, the activities did not continue in India for 90 days, because there were no activities carried on in India at all. The services were rendered through email, phone, and similar remote modes of communication.
The Tribunal therefore held that the factual foundation for a service PE was completely absent. The observations of the CIT(A) that services had continued in India were not supported by any material or evidence on record and were based on imaginary facts. The phrase “services are performed within that State” in the DTAA is significant: it presupposes physical performance of services in India through the enterprise’s own personnel. Since no such personnel were present in India, the service PE clause could not be triggered.
3. CIT(A) could not substitute a new basis for the Assessment Order
A further procedural point weighed with the Tribunal. The Assessing Officer had originally taxed the amount as fees for technical/managerial services. He had tacitly accepted the position that there was no PE during the assessment proceedings. The CIT(A), however, did not agree with the Assessing Officer’s characterisation and instead introduced a fresh theory of a service PE.
The ITAT held that the CIT(A) could not substitute a new basis for the Assessment Order. An appellate authority may confirm, modify, or reverse an order, but it cannot uphold a tax demand on an entirely new ground that was never raised by the Assessing Officer, particularly when the assessee had no adequate opportunity to meet that ground at the assessment stage. This principle acquires added importance in international taxation, where the precise treaty article under which income is taxed determines the computation, deductions, and attribution.
4. Taxability under the Act and the DTAA not attracted
The CIT(A) had observed that there was no dispute that receipts from managerial services were taxable under the Income-tax Act. The Tribunal, however, did not permit this broad domestic-law proposition to override the character of the receipt. Since the receipt was a reimbursement of actual expenses with no mark-up, there was no income chargeable to tax under the Act. Similarly, under Article 7 of the India-USA DTAA, business profits of a US enterprise are taxable in India only if the enterprise carries on business in India through a PE. Since no service PE existed, India could not tax the reimbursement as business profits.
The Tribunal also noted that the assessee had invoked the “make available” clause under Article 12 as a safeguard. But the more fundamental answer lay in the absence of income and absence of a PE. The ITAT set aside the orders of both the lower authorities and directed deletion of the addition.
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Conclusion
The decision in Kohler Co. v. DCIT is a valuable guide for multinational groups with cross-charge reimbursement models. It clarifies that a mere reimbursement of expenses, supported by invoices and incurred on behalf of Indian entities, does not become taxable income merely because the recipient is a foreign holding company. More importantly, the judgment lays down the strict threshold for a service PE under the India-USA DTAA: mere remote facilitation, third-party service providers, and the absence of the assessee’s personnel in India will not satisfy the service PE test.
The ITAT has also reinforced the procedural discipline expected from appellate authorities. A CIT(A) cannot rewrite the Assessment Order by introducing a new basis of taxability, especially when the assessee has not been put on notice about that basis. The order is a reminder that both domestic deeming provisions and DTAA articles must be applied to the economic substance of a transaction, not to labels attached by the assessing authority.
This case will be persuasive in future disputes involving foreign parent companies and Indian subsidiaries, particularly on the taxability of group cost recharges and the interpretation of “employees or other personnel” for service PE purposes.
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