Reimbursement character under tax treaty defeats reclassification as royalty or management fee where no profit element is shown.

Cost-to-cost reimbursement of legal and professional expenses, supported by third-party invoices and accepted on facts as having no markup, was held not to constitute taxable income in the non-resident recipient's hands under Article 13 of the India-Denmark DTAA. Because the assessment order did not dislodge the reimbursement character and no profit element was shown to be embedded in the receipt, the amount could not be recharacterised as royalty or management fee for treaty taxation. The transfer pricing treatment in the payer's hands did not change the tax character of the same receipt in the recipient's hands, and the addition was therefore unsustainable.

---

---

Issues: Whether the reimbursement of legal and professional expenses received from an Indian associated enterprise could be treated as income chargeable to tax in the hands of the non-resident assessee under Article 13 of the India-Denmark tax treaty.

Analysis: The reimbursement was accepted on facts as cost-to-cost reimbursement without markup. The assessment order itself did not dislodge the basic character of the receipt as reimbursement, and the expenses were supported by third-party invoices for legal and professional services. Once the payment retained the character of reimbursement and no profit element was shown to be embedded in it, the amount could not be recharacterized as royalty or management fee for treaty taxation purposes. The transfer pricing position in the payer's hands did not alter the character of the receipt in the assessee's hands.

Conclusion: The addition was unsustainable and the reimbursement could not be taxed as income under Article 13 of the DTAA.

---