Software payment routing and reimbursement characterization require fresh examination before royalty and withholding tax treatment applies.

The ITAT Mumbai noted that software payments routed through an overseas affiliate could not be treated as a mere reimbursement without examining the real character of the transaction. Although the agreement was executed after the payments, its retrospective wording and the invoices naming the affiliate as customer suggested a routed purchase rather than simple expense recovery. Because the first appellate authority had not verified the nature of the software acquisition or the factual basis for the reimbursement finding, the matter required fresh examination before applying the legal tests on royalty and withholding tax. The reimbursement finding was set aside and the issue remitted for reconsideration.

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Issues: Whether the payment routed through the overseas affiliate was a mere reimbursement of expenses or a purchase of software on behalf of the assessee, and whether the matter required fresh examination of the nature of the software acquisition.

Analysis: The agreement was executed after the relevant transactions, yet stated that it operated retrospectively. The invoices showed the overseas affiliate billing the assessee as customer, indicating that the arrangement was not a simple reimbursement but a routed purchase. The first appellate authority had proceeded on the footing that the payment was reimbursement and had not examined the true nature of the software acquired. The factual foundation on which the earlier conclusion rested was therefore incomplete, and the character of the transaction needed verification before applying the legal tests governing royalty and withholding tax.

Conclusion: The finding that the payment was a mere reimbursement was set aside, and the issue was remitted to the first appellate authority for fresh consideration of the nature of the software transaction and consequential application of law.

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