P.V. Reddi, J. Chairman -
(1.) THE applicant - ABB Limited which is a company incorporated in India having its registered office in Bangalore has filed this application seeking advance ruling in respect of the Cost Contribution Agreement which it proposes to enter into with its group Company by name, ABB Research Limited, Zurich. The following questions are formulated by the applicant:
(1) Whether pursuant to the Cost Contribution Agreement proposed to be entered by the applicant with ABB Research Limited, Zurich, ("ABB, Zurich"), the payments to be made to ABB, Zurich, representing the applicant's share of the costs incurred towards basic Research and Development ("R&D") activities, constitutes "income" in the hands of ABB, Zurich within the meaning of the term in section 2(24) of the Income -tax Act, 1961 ?
(2) Based on the answer to Question (1) above, and in view of the facts as stated in Attachment III, and also in light of the declaration provided by ABB, Zurich that it does not have a permanent establishment in India in terms of Article 5 of the 'Agreement between the Government of the Republic of India and the Government of the Swiss Confederation for the avoidance of double taxation with respect to taxes on income ('India -Swiss Tax Treaty'), whether the proposed payments by the applicant to ABB, Zurich suffer withholding tax under section 195 of the Act and if so, at what rate ?
(3) Whether tax is required to be withheld on the entire payment in case the cost contribution payment and co -ordination fee are raised under a single invoice by ABB, Zurich though identified separately ?
The facts stated by the applicant are given hereunder:
The applicant has various business divisions such as power products and systems, automation systems, process automation and robotics systems. The applicant's plants are located at Bangalore and 6 other cities in India. ABB India is a part of the ABB Group, which is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in over 100 countries and employs about 120,000 people. As per ABB Group's Research & Development (R&D) policy, all basic R&D for the ABB Group is co -ordinated and directed through ABB Research Limited, Zurich ('ABB, Zurich'), ABB entities who wish to participate in the basic R&D enter into a Cost Contribution Agreement (for short, CCA or 'Agreement') with ABB, Zurich. As per the Agreement, the entire costs of the basic R&D are shared between the ABB entities participating in the Agreement, based on an allocation key. The participating ABB entities are allowed a royalty -free unlimited access to the research results including any Intellectual Property Rights ('IPRs') generated from the basic R&D. However, for administrative reasons, the IPR generated as a result of the basic R&D under the Agreement is legally owned by ABB, Zurich.
1.1 The operative contract research activities under the Agreement are performed within the ABB Group through Corporate Research Centres ("CRC") in various countries and such CRCs are remunerated on a cost plus basis by ABB, Zurich. Further, a co -ordination fee is payable by each participating ABB entity to ABB, Zurich for its role as administrator and co -ordinating agency under the Agreement. None of the personnel of ABB, Zurich are required to visit India for rendering any work. Any fee received by ABB, Zurich from licensing any IPR generated under the Agreement to any entity including ABB entities, is used to reduce the overall costs of the basic R&D. Accordingly, the applicant states, the ABB entities participating in the Agreement are 'economic owners' of the research results including any IPRs generated under the Agreement. The CRCs do not have any rights to the research results or the IPR, and act only as contract research units for the ABB Group. The applicant is interested in directly participating in basic R&D activities of the ABB Group and accordingly, the applicant is proposing to enter into a Cost Contribution Agreement with ABB, Zurich.
1.2 The applicant further submits that ABB Group's basic R&D activities are co -ordinated and directed through ABB, Zurich. ABB Group entities who wish to participate in the basic R&D activities entered into a CCA with ABB, Zurich. As per the CCA, the entire costs of the basic R&D are shared between the ABB entities participating in the CCA based on a pre -agreed allocation key. The ABB entities participating in the CCA are allowed a royalty free unlimited access to the research results including any IPRs generated. The applicant has referred to paragraph 2 to clause 6.2 of the CCA which provides as follows:
The total actual costs for Corporate R&D shall be borne by the Parties in proportion to the value added achieved by the Parties and their respective subsidiaries in the Parties' respective countries of domicile. For the purpose of this agreement, value added shall follow the definition in the ABB Accounting and Reporting Guidelines.
Value added is defined as: Personnel expenses + Earnings before interest and tax+/ - unusual items.
(2.) THE proposed Cost Contribution Agreement between the participating companies and ABB Research Limited, Zurich states in the Preamble that the parties wish to participate in the funding of corporate research and development in the ABB Group in order to make optimum use of the available resources and to increase efficiency and reduce cost. Moreover, it is stated that the parties to wish to appoint a separate company which on behalf of the parties will administer the corporate R&D. ABB Research Limited, Zurich has been identified as the administrator as seen from clause (2). The applicant's counsel has also referred to certain other clauses of the Agreement proposed to be entered into, apart from the clauses noted earlier. They are:
Article 6.1 of the CCA provides that the R&D Board of the ABB Group would decide the Corporate Research and development programme and the corresponding Budget.
Article 6.2 of the CCA in turn provides that the R&D Board will appoint certain parties (hereinafter referred to as 'CRCs') who would carry out the actual R&D within the approved Budget. It further provides that the actual costs incurred for carrying out the corporate R&D would be borne by the parties which expression would include the applicant and other parties mentioned in Annexure 1 to the Agreement in proportion to the 'value added' achieved by the participants and the subsidiaries of the participants in their respective countries of domicile.
Article 6.3 of the CCA sets out the manner in which the costs are to be funded. In brief, ABB, Zurich would issue quarterly invoices to the participants on the basis of the budgeted costs for Corporate R&D for the previous quarter. The costs would be allocated amongst the various participants based on the budgeted value added. At the end of the each year, the actual costs incurred by ABB, Zurich would be allocated amongst the participants based on the actual value added and the differential between the actual and the budgeted figures would be adjusted and the necessary recovery/payments made.
Article 7.1 of the CCA provides that the information and corresponding intellectual property rights, if any, achieved as a result of the corporate R&D are to become the proprietary rights of ABB, Zurich subject to the right of free access which is granted to each of the participants and its subsidiaries in terms of Article 7.4. [Emphasis supplied]
Article 7.5 of the CCA provides that the fruits of the research could be made available for use to persons other than the participants who may or may not be part of the ABB Group. The license income derived is to be deducted from the Corporate R&D costs that are to be shared by the participants as per clauses 6.3 -1 and 6.3 -2 of the CCA.
The applicant sets out its case in brief as follows:
Under the CCA Agreement, ABB, Zurich acts as a co -ordinating agency for monitoring the basic R&D undertaken within the ABB Group and ensuring that all the basic R&D costs are pooled and allocated amongst the ABB entities participating in the CCA, based on the allocation key reflecting the benefits. Accordingly, the proposed cost contribution by ABB India as a participant to the CCA represents a reimbursement of the costs incurred by ABB, Zurich towards basic R&D, the results of which are freely accessible by ACC India without any further payment. Further, any fee generated by ABB, Zurich from licensing any IPR generated under the CCA is used to reduce the overall costs of the basic R&D. Accordingly, such fees go to reduce the basic R&D costs shared amongst the ABB entities participating in CCA. Accordingly, in substance and form, the proposed payment by ABB India to ABB, Zurich cannot be described as consideration for any services proposed to be provided by ABB, Zurich or a payment towards any royalty. It constitutes only a pooling and coordinating arrangement under which the amounts proposed to be contributed by ABB India and other ABB entities participating in the CCA are credited to a joint account from which the basic R&D expenses are met. It is, therefore, submitted that the payments made by the applicant under the CCA, being cost re -charged based on an allocation key, do not constitute income in the hands of ABB, Zurich. The applicant has clarified that the 'coordinating fee' charged by ABB, Zurich will be subject to withholding tax under section 195 of Income -tax Act but not the cost contribution payments made by way of reimbursement. Thus, the applicant invokes a well known principle that a mere reimbursement of expenses cannot be construed as a receipt bearing the characteristics of income.
(3.) IT is the contention of the applicant that the payments to be made under CC Agreement to ABB, Zurich cannot be treated as income at all as it is merely reimbursement of the cost incurred on account of R&D activity the result of which is shared by all group concerns. Assuming that it is income, it is contended that it partakes the character of business income. That being so, the Indian Government is precluded from subjecting such income to tax having regard to article 7(1) of the India -Swiss Tax Treaty in the absence of Permanent Establishment in India. The existence of PE in India is a prerequisite to tax the business profits as per article 7. In view of the absence of PE, the question arises whether the 'cost reimbursement' can be considered to be 'royalties' or 'fees for technical services' within the meaning of article 12. The learned counsel submits that article 12 is not at all attracted in the present case.;