Treaty classification limits: software and reimbursement receipts were neither royalty nor fees for technical services on these facts.

Amounts recovered for a standard group-wide software facility, together with marketing and training-related reimbursements, were not fees for technical services because no technical knowledge, skill, know-how, or technical plan was made available under article 13(4)(c) of the Indo-UK DTAA. The receipts were also not supportable as royalty on the record. Where the earlier remand was confined to the treaty test for fees for technical services, the Assessing Officer could not enlarge the enquiry by recharacterising the same receipts as royalty; that departure from the remand scope rendered the assessment unsustainable and the additions were deleted.

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Issues: (i) Whether the amounts recovered towards Lotus Notes software/user charges and allied reimbursements, as well as the marketing and training-related payments, constituted fees for technical services or royalty under the Income-tax Act, 1961 and the Indo-UK Double Taxation Avoidance Agreement; (ii) whether the assessment could be sustained when the Assessing Officer travelled beyond the Tribunal's remand directions by treating the receipts as royalty.

Issue (i): Whether the amounts recovered towards Lotus Notes software/user charges and allied reimbursements, as well as the marketing and training-related payments, constituted fees for technical services or royalty under the Income-tax Act, 1961 and the Indo-UK Double Taxation Avoidance Agreement.

Analysis: The remand by the earlier Tribunal was confined to examining whether the disputed receipts fell within the scope of fees for technical services under article 13(4)(c) of the Indo-UK DTAA. On the facts, the software charges were only cost recoveries for a standard group-wide facility procured without any markup, and there was no material to show that technical knowledge, skill, know-how, or a technical plan was made available. The other receipts were in the nature of marketing and professional reimbursements and were also not shown to satisfy the treaty test for fees for technical services. The characterization of the receipts as royalty was not supportable on the record.

Conclusion: The amounts could not be treated as royalty or fees for technical services.

Issue (ii): Whether the assessment could be sustained when the Assessing Officer travelled beyond the Tribunal's remand directions by treating the receipts as royalty.

Analysis: The Assessing Officer was bound by the limited remit of the remand and could only determine whether the payments were fees for technical services within the treaty framework. By adopting a royalty characterization, the Assessing Officer exceeded that remit. The appellate order also did not cure the defect, because the disputed addition had not been properly adjudicated within the scope of the remand. The resulting assessment action was therefore unsustainable.

Conclusion: The assessment could not be sustained and the additions were deleted.

Final Conclusion: The appeals succeeded, the impugned additions were deleted, and the receipts were held not taxable as royalty or fees for technical services on the facts of the case.

Ratio Decidendi: Where a remand is confined to deciding whether a payment constitutes fees for technical services under the treaty, the authorities cannot enlarge the enquiry by recharacterizing the same payment as royalty; further, a mere cost reimbursement for a standardized software facility without making available technical knowledge, skill, know-how, or a technical plan does not constitute fees for technical services under article 13(4)(c) of the DTAA.

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