Cost reimbursement receipts were treated as non-taxable reimbursements, not royalty, where payments matched actual outgoings without mark-up.

Amounts received by a non-resident under a cost reimbursement arrangement with an Indian group company were characterised as reimbursements, not royalty. The payments were linked to actual rebate and discount outgoings, described as administration charges, and matched the assessee's reimbursement obligations without any mark-up. Because the receipts represented recovery of actual expenses and not consideration for use of brand or other rights, they did not fall within royalty under section 9(1)(vi). The transfer pricing treatment in the payer's proceedings also supported the same factual character. The addition was deleted and the receipts were treated as not taxable in India.

---

---

Issues: Whether amounts received by a non-resident assessee from its Indian group company under a cost reimbursement arrangement were taxable as royalty or were mere reimbursements not chargeable to tax in India.

Analysis: The arrangement showed that the assessee was required to pass on rebates and discounts to retailers and to recover the proportionate share from its group companies, including the Indian company, on the basis of sales achieved. The agreement was framed as a cost reimbursement arrangement, the payments were described as administration charges, and the record showed that the receipts corresponded to actual rebate/discount outgoings without any mark-up. The same factual character of the payments had also been accepted in the transfer pricing proceedings of the payer company. On these facts, the receipts could not be treated as consideration for use of brand or as royalty within section 9(1)(vi).

Conclusion: The receipts were held to be pure reimbursements of expenses and not taxable as royalty in India. The addition was deleted in favour of the assessee.

---