Make-available test and at-cost software reimbursement blocked taxability under the India-US DTAA and domestic royalty rules.

Engineering fees for services rendered from outside India were not taxable as fees for included services under the India-US DTAA because the services did not make available technical knowledge, skill, know-how, or a technical plan enabling independent future use by the recipient. Reimbursement of software charges was also not taxable as royalty because the amounts were recovered at cost, without profit element, and no right to use copyright or other software rights was transferred. The ITAT Delhi deleted the related additions and held that treaty protection prevailed over a broader domestic-law characterization where the treaty definition was more beneficial.

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Issues: (i) whether engineering fees received for services rendered from outside India were taxable as fees for included services under the India-US DTAA; (ii) whether reimbursement of software charges was taxable as royalty under the Income-tax Act, 1961 and the India-US DTAA.

Issue (i): whether engineering fees received for services rendered from outside India were taxable as fees for included services under the India-US DTAA.

Analysis: The engineering services were rendered from the United States and the recipient in India had to continue to obtain similar assistance for each project. The services did not transfer technical knowledge, skill, process, or know-how in a manner that enabled the recipient to apply the technology independently in future. Under the treaty, technical services are taxable as fees for included services only if they are ancillary and subsidiary to the relevant right, property, or information, or if they make available technical knowledge, experience, skill, know-how, processes, or a technical plan or design.

Conclusion: The engineering fees were not taxable in India as fees for included services.

Issue (ii): whether reimbursement of software charges was taxable as royalty under the Income-tax Act, 1961 and the India-US DTAA.

Analysis: The software payments were recovered on an at-cost basis without any profit element and were in the nature of reimbursement of expenses. The assessee did not grant any right to use copyright in software, and the amount received was not consideration for transfer of copyright or any right in the software. Reimbursement of expenses cannot be treated as income merely because the lower authorities relied on amendments in the domestic statute where the treaty definition was more beneficial.

Conclusion: The reimbursement of software charges was not taxable as royalty.

Final Conclusion: The additions on account of engineering fees and software reimbursements were deleted, and the assessee succeeded on the substantive tax issues decided on merits.

Ratio Decidendi: Technical services are taxable as fees for included services only when they make available technical knowledge or skill so that the recipient can apply it independently, and an at-cost reimbursement without transfer of copyright or a right to use software is not royalty.

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