OP your reaction to me is quite oppositional too. I get that you're upset but portraying a 7yo child as a 'bad person' and getting exasperated with people who are trying to help, will not work for you.
I've dealt with similar stuff with a similar aged child. The points I'm making come from that experience.
Two separate things really:
When I say 'duty to report' what I'm saying is that the teacher is in charge of the class and needs to know what is going on, so that they can do their job and look after all the children properly. That's a simple way to explain it to your dd. If someone behaves badly, other children need to let the teacher know - so that the teacher can help that person behave better.
Children are often reluctant to report things for all sorts of reasons, including not wanting to draw attention to themselves, to 'cause trouble', make someone else dislike them, or not being sure how their report will be received. Your dd needs to know that the teacher does want to hear from her about things that upset her. The teacher needs to tell her that.
The point is that children often think only about how something affects them and some children will put up with a lot before reporting. What I'm saying is that they need to understand that it isn't only about them and their feelings. It isn't up to them to decide what is serious and important and what isn't. The person who will take that decision is the teacher. All the child has to do is pass on information.
My point about good people doing bad things is this. If you portray this other child as evil, as inherently bad, because they've done one bad or unkind thing (or a series of unkind things), then what happens next year, when your dd does something silly or thoughtless, even mean or manipulative (all children go through phases of trying out different behaviours, to find out what works and what is acceptable)?
According to your teaching, children who do mean things are bad, evil people who are incapable of change and must be kept away from others. So how will your dd be able to reconcile her own poor choice of behaviour, which has upset someone else, with her idea of herself as a good, worthy, loveable person? Will she be able to focus on the behaviour in isolation, on its impact on the other person, so apologise, acknowledge her mistake, learn from it and move on?
Or will she think 'but I am a good person, so my behaviour must always be right, or even it wasn't I didn't mean to upset them so it doesn't really count, so I'll just carry on being lovely, wonderful me'? That disables her development. It makes her unable to focus on the behaviour, on empathy for its effect on the other person and on learning and growing from the experience.
All children need to learn that they will get things wrong sometimes, they will upset other people, intentionally or not and they need to learn how to deal with that and how to examine and adapt their behaviour as a consequence.