Reimbursement of lease line charges not royalty; treaty protection and no TDS disallowance on cost-to-cost payments.

Pure reimbursement of lease line and related IT infrastructure charges paid to an overseas associated enterprise, on a cost-to-cost basis without markup, was held not to contain any income element and could not be re-characterised as royalty merely because it related to facility or bandwidth use. On that basis, disallowance under section 40(a)(i) for non-deduction of tax at source was deleted, with treaty protection remaining applicable on the facts. The claim for set-off and recomputation of brought forward unabsorbed depreciation was not rejected outright; it required verification of earlier year records, examination of any double disallowance, and fresh recomputation after giving effect to prior year relief, if any.

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Issues: (i) Whether reimbursement of lease line and related IT infrastructure charges paid to the overseas associated enterprise could be re-characterised as royalty so as to attract disallowance under section 40(a)(i) for non-deduction of tax at source. (ii) Whether the assessee was entitled to set off and re-computation of brought forward unabsorbed depreciation against the current year's income.

Issue (i): Whether reimbursement of lease line and related IT infrastructure charges paid to the overseas associated enterprise could be re-characterised as royalty so as to attract disallowance under section 40(a)(i) for non-deduction of tax at source.

Analysis: The payment was shown to be on a cost-to-cost basis without any markup and was supported by invoices and supporting material. The same nature of payment had been accepted in earlier years. The arrangement did not disclose any income element in the hands of the recipient, and the payment could not be brought within royalty merely because it related to use of facilities or bandwidth. The treaty position also remained applicable, and the wider domestic amendment could not displace the beneficial treaty provision in the facts of the case. On the authority of the cited precedents dealing with reimbursement and lease line charges, the disallowance under section 40(a)(i) could not be sustained.

Conclusion: The disallowance under section 40(a)(i) was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the assessee was entitled to set off and re-computation of brought forward unabsorbed depreciation against the current year's income.

Analysis: The allowance of unabsorbed depreciation depended on verification of the earlier year records and the effect of any relief granted in those years. The earlier records indicated that the matter required factual reworking rather than outright rejection. The Assessing Officer was therefore required to verify the assessee's claim, examine whether there had been any double disallowance, and recompute the eligible unabsorbed depreciation after giving effect to prior year relief, if any.

Conclusion: The matter was restored for verification and re-computation, and the issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive disputes considered in the order, with the transfer-pricing-related reimbursement disallowance deleted and the depreciation claim sent for fresh verification and recomputation.

Ratio Decidendi: A pure reimbursement of expenditure without markup and without any income element cannot be treated as royalty merely because the underlying payment relates to facility use, and such reimbursement does not attract a tax-deduction disallowance when the treaty position remains beneficial.

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