Treaty make available test and reimbursement principles govern taxation of SAP, consultancy and IT support receipts

SAP licence recoveries received on a cost-to-cost basis from an Indian subsidiary were treated as pure reimbursement with no income element, and therefore not taxable as income. Consultancy for factory project leadership, including planning, coordination, budgeting, reporting and supervision, was not taxed as fees for technical services because the treaty's make available test was not met; no technical knowledge or know-how was transferred for independent future use. IT support services were likewise not taxable as fees for technical services or royalty under the India-Sweden treaty, since they did not make available technical knowledge and were not ancillary to taxable royalty. The additions were deleted.

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Issues: (i) whether SAP software licence charges received from the Indian subsidiary were taxable as royalty or were merely reimbursement of third-party licence cost; (ii) whether consultancy services rendered for factory project leadership were taxable as fees for technical services despite the treaty's make available requirement; (iii) whether IT support services were taxable as fees for technical services or royalty under the India-Sweden treaty.

Issue (i): whether SAP software licence charges received from the Indian subsidiary were taxable as royalty or were merely reimbursement of third-party licence cost.

Analysis: The payment was shown to be for licences purchased from an outside vendor and recovered from the subsidiary on a cost-to-cost basis without markup. A receipt that is only a pass-through reimbursement and contains no income element cannot be taxed as income in the recipient's hands. The contention that the arrangement merely routed the purchase through the assessee did not alter the character of the receipt.

Conclusion: In favour of the assessee. The SAP licence recovery was held to be a pure reimbursement and not taxable as income.

Issue (ii): whether consultancy services rendered for factory project leadership were taxable as fees for technical services despite the treaty's make available requirement.

Analysis: The applicable treaty standard required that technical knowledge, skill, or know-how be made available to the recipient so that it could apply the technology independently in future. The services consisted of project leadership, planning, coordination, budgeting, reporting, and supervision of factory setup, but there was no transfer of technical knowledge enabling the Indian entity to perform similar services on its own later. Incidental benefit, efficiency gain, or involvement in project execution did not satisfy the treaty test.

Conclusion: In favour of the assessee. The consultancy receipts were held not taxable as fees for technical services.

Issue (iii): whether IT support services were taxable as fees for technical services or royalty under the India-Sweden treaty.

Analysis: The services were not shown to have made available technical knowledge, experience, skill, know-how, or processes to the recipient. The fact that the services supported SAP implementation or improved business efficiency did not by itself satisfy the treaty requirement. They were also not treated as ancillary and subsidiary to royalty within the relevant treaty framework, since the reimbursement for the software licence itself was not taxable as royalty and the service provider was not the same person as the software vendor.

Conclusion: In favour of the assessee. The IT support receipts were held not taxable under article 12.

Final Conclusion: The additions made on account of SAP licence reimbursement, consultancy services, and IT support services were deleted, and the appeal succeeded in full.

Ratio Decidendi: A reimbursement without income element is not taxable, and treaty-based taxation of technical services requires satisfaction of the make available test where the relevant treaty so provides.

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