Treaty override limits FTS and royalty taxation; software reimbursements, leased line recoveries, and section 234B interest excluded.

Treaty definitions of fees for technical services and royalty prevailed over wider domestic rules, and the protocol allowed reliance on the more beneficial OECD-based treaty position. Intra-group service receipts were taxable only to the extent they involved development and transfer of a technical plan or technical design, so the matter required restricted recomputation. Cost-to-cost recovery of leased line charges was not royalty because the DTAA did not adopt the domestic enlargement of "process". Reimbursement of software costs for antivirus products was also not royalty, as there was no transfer of copyright. Interest under section 234B was not leviable on the non-resident assessee on the facts found.

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Issues: (i) Whether the receipts for intra-group services were taxable as fees for technical services under the Income-tax Act, 1961 and the applicable treaty provisions, including whether the treaty's restricted scope and the India-USA "make available" standard applied; (ii) Whether the leased line charges recovered from the Indian entity were taxable as royalty under the Income-tax Act, 1961 and the India-Spain DTAA; (iii) Whether the software charge reimbursements constituted royalty; and (iv) Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Issue (i): Whether the receipts for intra-group services were taxable as fees for technical services under the Income-tax Act, 1961 and the applicable treaty provisions, including whether the treaty's restricted scope and the India-USA "make available" standard applied?

Analysis: The services comprised a mix of managerial, consultancy, and technical functions, including formulation of policies, supervision of their implementation, legal advice, and technical input in quality, research, and IT matters. On the domestic provision, consideration for managerial, technical, or consultancy services falls within section 9(1)(vii). Under the India-Spain DTAA, however, fees for technical services are confined to technical or consultancy services, excluding purely managerial services. The Protocol permitted recourse to a more beneficial treaty with an OECD member country, and the India-USA DTAA required, in its relevant part, either that technical knowledge, experience, skill, know-how, or processes be made available, or that the services consist of development and transfer of a technical plan or technical design. The material showed that at least part of the services involved developing and transferring technical plans and designs, though the record did not permit a precise quantification of the taxable portion.

Conclusion: The receipt was taxable in principle, but only to the extent relatable to development and transfer of a technical plan or technical design under the more beneficial treaty standard. The matter was therefore restricted and sent back for rational quantification. This issue was decided partly in favour of the assessee and partly in favour of the Revenue.

Issue (ii): Whether the leased line charges recovered from the Indian entity were taxable as royalty under the Income-tax Act, 1961 and the India-Spain DTAA?

Analysis: The recovery was on a pure cost-to-cost basis, with one-to-one correlation to the amount paid to the telecom provider and no markup. Though the domestic definition of royalty was widened by the statutory explanation to include transmission by cable, optic fibre, or similar technology, the treaty definition did not contain an equivalent expansion. Since the DTAA did not incorporate the domestic enlargement of "process", the extended domestic meaning could not be read into the treaty royalty clause.

Conclusion: The leased line recovery was not taxable as royalty under the DTAA. This issue was decided in favour of the assessee.

Issue (iii): Whether the software charge reimbursements constituted royalty?

Analysis: The assessee had purchased antivirus software for group use and recovered the cost from the Indian entity without markup. The software was a product, not a transfer of copyright. In view of the binding law on software payments, consideration for use of a software product does not constitute royalty.

Conclusion: The addition on account of software reimbursements was unsustainable. This issue was decided in favour of the assessee.

Issue (iv): Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee?

Analysis: For the relevant assessment year, the statutory amendment altering computation of advance-tax liability did not apply. In the case of a non-resident whose income is otherwise subject to tax deduction at source, the advance-tax default provision was not attracted on the facts found.

Conclusion: Interest under section 234B was not leviable. This issue was decided in favour of the assessee.

Final Conclusion: The service-fee addition survived only to the limited extent permitted by the treaty analysis and required recomputation, while the leased line, software, and interest additions were deleted. The appeal was accordingly only partly successful.

Ratio Decidendi: A domestic expansion of royalty or FTS cannot override a narrower treaty definition, and treaty benefits may be invoked where a protocol permits adoption of a more restricted OECD-based provision; software-product payments and cost-to-cost reimbursements do not constitute royalty merely by reason of statutory enlargement where the treaty text does not adopt that enlargement.

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