Engineering service payments through a parent can attract withholding, while an unsupported software licence disallowance cannot stand.

Amounts routed to a Canadian parent for engineering services were not treated as mere cost reimbursement where the commercial arrangement showed the parent procured or rendered services for consideration; the payment was therefore chargeable in India as fee for included services and attracted withholding tax. The assessee's software licence cross-charge was accepted as genuine, and the ad hoc restriction to 50% was deleted because there was no factual basis for splitting a proven licence cost. The separate question whether the software licence payment constituted royalty was not finally decided and was remanded for fresh examination of the underlying agreements and rights transferred.

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Issues: (i) Whether the amounts remitted by the assessee to its Canadian parent towards engineering services were mere reimbursement of expenses or constituted chargeable consideration liable to tax deduction at source; (ii) whether the assessee's share of software licence cost could be restricted to 50% as reasonable and whether the balance could be treated as taxable income in the hands of the non-resident recipient; (iii) whether the character of the software licence payment as royalty required fresh examination.

Issue (i): Whether the amounts remitted by the assessee to its Canadian parent towards engineering services were mere reimbursement of expenses or constituted chargeable consideration liable to tax deduction at source?

Analysis: The agreements and surrounding commercial arrangement showed that the services procured through the parent were part of the group's operating model and that the assessee derived benefit from the engineering services. The material relied upon to deny the assessee's benefit from the services was not treated as conclusive, while the service tax order and the contractual framework supported the assessee's case only to the limited extent that the payment was not a gratuitous transfer. However, the payment was not accepted as pure cost reimbursement without any profit element. On the facts, the payment was held to be consideration for services procured through the parent and taxable in India in the hands of the non-resident as fee for included services.

Conclusion: The assessee was liable to deduct tax at source on the engineering-service payments and was correctly treated as an assessee in default to that extent.

Issue (ii): Whether the assessee's share of software licence cost could be restricted to 50% as reasonable and whether the balance could be treated as taxable income in the hands of the non-resident recipient?

Analysis: The assessee produced supporting material showing procurement and sharing of software licences, and the authorities accepted the genuineness of the cross-charges. Once the payment for software licences was found genuine, there was no basis for accepting only 50% as reasonable and treating the balance as excessive. The record did not justify an ad hoc disallowance or a split characterisation on the facts proved.

Conclusion: The 50% restriction was deleted and the assessee's claim was accepted in full on this aspect.

Issue (iii): Whether the character of the software licence payment as royalty required fresh examination?

Analysis: The evidence on record was insufficient to conclusively determine the exact bundle of rights transferred under all the relevant software licence arrangements and whether the payment was for use of copyright or merely for use of a copyrighted article. In the absence of complete verification of the underlying agreements, the issue was not finally decided on merits and was restored for fresh examination.

Conclusion: The question whether the software licence payment was royalty was remanded for fresh adjudication.

Final Conclusion: The appeals succeeded only in part: the engineering-service payments continued to attract withholding obligation, the ad hoc 50% disallowance on software licence charges was set aside, and the royalty character of the software licence payment was sent back for reconsideration.

Ratio Decidendi: A payment routed through a parent company is not treated as mere reimbursement merely because it is claimed at cost; where the underlying arrangement shows that the non-resident renders or procures a service for consideration, the amount remains chargeable in India and attracts withholding, while an ad hoc curtailment of a proven cross-charge cannot survive without a factual basis.

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