Software-related receipts were treated as taxable IT service consideration, not reimbursement or royalty, under a centralized service model.

Receipt for software and IT licence costs was held not to be reimbursement because the expenditure was not incurred strictly for and on behalf of the Indian affiliate, and the allocation lacked a clear one-to-one correlation with amounts recovered. It was also held not to be software royalty, as no software licence or copyright rights were transferred or sublicensed; the software was used to support a centralized IT service model. The amount was treated as part of the consideration for IT services rendered to the affiliate, and the attempted bifurcation into taxable and non-taxable components was found artificial.

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Issues: (i) Whether the amount received from the Indian affiliate was a reimbursement of software and IT licence costs. (ii) Whether the amount was software royalty. (iii) What was the true nature of the receipt.

Issue (i): Whether the amount received from the Indian affiliate was a reimbursement of software and IT licence costs.

Analysis: A receipt can qualify as reimbursement only if the expenditure is incurred for and on behalf of the other party and the same amount is recovered without any mark-up or dilution of benefit. The services described in the Master Services Agreement and the monthly cost-allocation workings were found to be identical, showing that the so-called reimbursement was in substance part of the assessee's centralized IT service model. The software purchased from third parties was integrated into the assessee's own infrastructure and was not passed on to the Indian affiliate as such. The allocation methodology was also found to lack a clear one-to-one correlation between cost incurred and amount recovered.

Conclusion: The receipt was not a reimbursement.

Issue (ii): Whether the amount was software royalty.

Analysis: The principle in Engineering Analysis applies where a licensee obtains only a copyrighted article and no copyright is parted with. Here, there was no transfer of software licences or any sub-licensing to the Indian affiliate. The software was used by the assessee to create a centralized IT infrastructure for rendering services to group entities. The amount received was therefore for services facilitated by software use, not for transfer of software rights.

Conclusion: The receipt was not software royalty.

Issue (iii): What was the true nature of the receipt.

Analysis: Since the receipt was neither reimbursement nor royalty, and since the services for which the disputed amount was charged were the same as those covered by the master arrangement under which other receipts were already offered to tax, the amount formed part of the consideration for the IT services rendered to the Indian affiliate. The bifurcation of receipts into taxable and non-taxable components was held to be artificial.

Conclusion: The receipt was taxable as part of the consideration for IT services and was liable to tax in India.

Final Conclusion: The addition made by the tax authorities was upheld and the assessee's challenge failed.

Ratio Decidendi: A claim of reimbursement fails unless the expenditure is incurred strictly on behalf of the other party and recovered as such without dilution, while software used to render integrated IT services does not become royalty merely because the underlying software was purchased from third parties.

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