Software licence allocations, genuine reimbursements, and beneficial treaty rate rules shaped the tax treatment of group receipts.

Software licence cost allocations were not treated as royalty because the assessee had only a limited right to use copyrighted software articles and no copyright rights were transferred; the receipt was also not business profits absent a permanent establishment in India. Reimbursements for travelling, freight, other charges, and internet services were accepted as non-taxable where the record showed actual cost recovery, direct nexus with third-party invoices, and no markup. The assessee was also allowed to claim the more beneficial domestic tax rate under the treaty-saving provision, even though the claim was raised during assessment, because there is no estoppel against statute and the correct legal rate prevails.

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Issues: (i) whether the receipts from software licence cost allocation were taxable as royalty or business income, or were mere reimbursement; (ii) whether reimbursement of travelling, freight and other charges was taxable; (iii) whether reimbursement of internet charges was taxable; and (iv) whether the income declared by the assessee was liable to be taxed at 15% under the treaty or at 10% under the Act.

Issue (i): whether the receipts from software licence cost allocation were taxable as royalty or business income, or were mere reimbursement.

Analysis: The software expenses were incurred by the assessee on purchase of specific software licences from third-party vendors and were then pooled and allocated among group entities on the basis of employee strength. The resulting charge to the Indian entity did not represent a direct pass-through of the exact cost of any identified software licence, and therefore did not constitute reimbursement in the strict sense. However, the assessee acquired only a limited right to use copyrighted software articles and did not obtain any copyright rights capable of being transferred to group entities. Applying the principle that transfer of a copyrighted article is different from transfer of copyright, and following the governing Supreme Court ruling on software payments, the amount could not be treated as royalty. In the absence of a permanent establishment in India, it also could not be assessed as business profits.

Conclusion: The amount of Rs. 86,55,225 was held not taxable in the hands of the assessee.

Issue (ii): whether reimbursement of travelling, freight and other charges was taxable.

Analysis: The record showed a direct nexus between the expenses incurred with third-party vendors and the exact amounts recovered from the Indian entity for identified employees and services. The recovery was on actual cost basis without any markup and with a clear one-to-one correlation between outgoing and recovery.

Conclusion: The reimbursement of Rs. 12,68,764 was held not taxable.

Issue (iii): whether reimbursement of internet charges was taxable.

Analysis: The invoices from the service provider identified the Indian location and corresponding service charges, and the assessee recovered the exact amount attributable to the Indian entity without markup. The evidence established actual reimbursement rather than a cost-sharing arrangement lacking correlation.

Conclusion: The reimbursement of Rs. 30,31,448 was held not taxable.

Issue (iv): whether the income declared by the assessee was liable to be taxed at 15% under the treaty or at 10% under the Act.

Analysis: The assessee was entitled to opt for the more beneficial domestic rate under the tax treaty saving provision. Since the relevant provision of the Act prescribed a lower rate for royalty and fees for technical services for the year in question, the assessee could validly claim the beneficial rate even though the claim was raised during assessment proceedings. There was no estoppel against the statute, and the Tribunal was not constrained by the return position in granting the correct legal relief.

Conclusion: The income was directed to be taxed at 10% under the Act instead of 15% under the treaty.

Final Conclusion: The appeal succeeded on the principal issues of taxability of software-related receipts and reimbursement claims, and the assessee was also granted the lower statutory tax rate on the declared royalty and fee receipts.

Ratio Decidendi: A receipt is not royalty unless copyright rights are parted with, reimbursement requires a direct one-to-one recovery of actual cost, and an assessee may invoke the more beneficial domestic tax rate under the treaty-saving provision even if the claim is not made in the original return.

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