Mere Marketing Support Not ‘Fees for Included Services’, but Excessive Claims Need Proof: ITAT Caps Allowable Marketing Expenses at 20%

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed cross-appeals filed by the Revenue and the assessee in a significant ruling concerning tax deduction at source (TDS) obligations on cross-border payments for marketing and support services under the India–US Double Taxation Avoidance Agreement (DTAA). The bench of Sudhir Pareek (Judicial Member) and Rifaur Rahman, (Accountant Member) has remanded key issues relating to the nature and quantum of payments made to a US-based Associated Enterprise (AE), holding that unexplained outsourcing and administrative costs could attract disallowance under Section 40(a)(i) of the Income-tax Act, 1961 The dispute arose from assessments for AYs 2012-13 and 2013-14 involving payments made by the Indian company to its AE in the United States towards marketing and support services. For AY 2013-14, the assessee had declared a substantial loss and claimed deduction of nearly ₹198 crore paid to its US AE without withholding tax, contending that the payments were not taxable in India as they constituted business income of the AE, earned outside India, with no permanent establishment (PE) in India. The Assessing Officer (AO), however, treated the payments as “Fees for Included Services” (FIS) under Article 12 of the India–US DTAA and “fees for technical services” under Section 9(1)(vii) of the Act. On this basis, the AO disallowed the entire payment under Section 40(a)(i) for failure to deduct TDS under Section 195. The Commissioner of Income Tax (Appeals) deleted the disallowance, holding that the services were rendered outside India, did not “make available” technical knowledge or skills, and therefore were not taxable in India. The Revenue challenged this finding before the Tribunal, also disputing the deletion of disallowance on account of provision for customer refunds. The ITAT carefully examined the master services agreement and the invoices raised by the US AE. While acknowledging that the AE had no PE in India and that pure marketing support services rendered abroad would generally not be taxable in India, the Tribunal expressed serious reservations about the nature and scale of certain cost components claimed. The Bench noted that a significant portion of the amounts billed comprised expenses such as process outsourcing costs, on-ground technical support, and payment gateway charges, which together accounted for a disproportionately high share of the total administrative expenses. The assessee failed to adequately explain the basis for allocation and the exact nature of these services. The Tribunal held that mere labeling of payments as “marketing support” is insufficient without substantiating the underlying cost structure. Certain components, particularly process outsourcing costs, could potentially fall within the ambit of FIS if they involve technical or specialized services. In the absence of proper documentation, blanket acceptance of the assessee’s claim was unwarranted. Accordingly, the ITAT set aside this issue and directed the AO to allow only clearly identifiable marketing expenses and to restrict the remaining administrative and support costs to 20%, unless the assessee substantiates them with proper evidence. On the issue of provision for refunds claimed as expenditure, the Tribunal held that while refund liabilities are inherent in subscription-based technical support businesses, provisions cannot be allowed mechanically year after year. The assessee must demonstrate a consistent correlation between provisions created and actual refunds paid. The matter was remanded to the AO to verify historical data on provisions versus actual refunds, with directions to reverse any excess provision and tax it as income. The Tribunal also admitted and allowed an additional ground raised by the Revenue concerning delayed deposit of employees’ PF and ESI contributions, following the Supreme Court’s ruling in Checkmate Services Pvt. Ltd., thereby restoring the disallowance under Section 36(1)(va). Case Details Case Title: Addl.CIT Versus Iyogi Technical Services Private Limited Case No.: ITA No.2064/Del/2018 Date: 05.01.2026 Counsel For Petitioner: Gagan Kumar, Advocate Counsel For Respondent: Dharm Veer Singh, CIT DR Click Here To Read Order Read More: Limitation Applies Despite DRP Route: ITAT Quashes Oracle India’s Final Assessment as Time-Barred

Mere Marketing Support Not ‘Fees for Included Services’, but Excessive Claims Need Proof: ITAT Caps Allowable Marketing Expenses at 20%

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