India-UK DTAA treatment of software reimbursements and support services: no royalty or fees for technical services found.

Receipts recovered as software charges were treated as cost-to-cost payments for standard third-party software, with no right in copyright or transfer of copyright rights; on that basis, they were not royalty under the Income-tax Act or Article 13 of the India-UK DTAA. Group support, IT-shared services, regional charges, and similar support receipts were found to be routine managerial and administrative reimbursements without any making available of technical knowledge, skill, know-how, or process; they therefore did not qualify as fees for technical services under the Income-tax Act or Article 13. The additions were deleted and the revenue's appeals failed.

---

---

Issues: (i) Whether amounts recovered towards software charges were taxable as royalty under the Income-tax Act and Article 13 of the India-UK DTAA. (ii) Whether group support, IT-shared services, Middle East and South Asia regional charges, and other support charges were taxable as fees for technical services under the Income-tax Act and Article 13 of the India-UK DTAA.

Issue (i): Whether amounts recovered towards software charges were taxable as royalty under the Income-tax Act and Article 13 of the India-UK DTAA.

Analysis: The receipts were treated as cost-to-cost recoveries for standard third-party software used by the group affiliates. The arrangement did not confer any right in copyright or any transfer of copyright rights, and the services were only for use of standard software facilities. In light of the treaty provisions and the governing principle laid down for software payments, such receipts did not constitute royalty.

Conclusion: The software charges were not taxable as royalty and the disallowance was rightly deleted.

Issue (ii): Whether group support, IT-shared services, Middle East and South Asia regional charges, and other support charges were taxable as fees for technical services under the Income-tax Act and Article 13 of the India-UK DTAA.

Analysis: The services were found to be routine support, managerial, administrative, and operational in nature, recovered on a cost-to-cost basis without a mark-up or income element. The record did not show that any technical knowledge, skill, know-how, or process was made available to the recipient affiliates so as to enable them to perform the services independently. The treaty test for fees for technical services was therefore not satisfied.

Conclusion: The impugned receipts were not taxable as fees for technical services and the additions were rightly deleted.

Final Conclusion: The revenue's appeals failed in full, and the relief granted by the first appellate authority was sustained.

Ratio Decidendi: Under the India-UK DTAA, service receipts are taxable as fees for technical services only when the service is technical or consultancy in nature and makes available technical knowledge, skill, know-how, or processes to the recipient; mere cost reimbursements or use of standard software without transfer of copyright rights do not attract taxation as royalty.

---