TMI Blog2010 (3) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... ed:- 15-3-2010 - Mr. Justice P.V. Reddi and Mr. J. Khosla,JJ. Present for the Applicant: Mr. Percy Pardiwalla, Ms. Vasanti Patel, Mr. K.J. Sheth, Mr. Anil Lukose. Present for the Department: Mr. Prakash H. Adnur. RULING 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BB 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. 2.2. The applicant further submits that ABB Group's basic R D activities are coordinated 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 unlimit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 4. The applicant sets out its case in brief as follows: Under the CCA Agreement, ABB Zurich acts as a coordinating agency for monitoring the basic R D undertaken within the ABB Group and ensuring that all the basic R D costs are pooled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 'royalties' or 'fees for technical services' within the meaning of Art.12. The learned counsel submits that Art.12 is not at all attracted in the present case. 6. It is not necessary for us to delve into the question whether the receipts in question can at all be treated as income because even if it amounts to business income, it does not make material difference in the absence of PE. Therefore, the real contentious issue is whether it is income in the nature of royalty. Before going into that question, we may point out that the Revenue has taken a stand, unsupported by reasons, that the payments to ABB, Zurich would fall under 'fees for technical services' ('FTS'). 'FTS' is defined in Art.12.4 of the Treaty as : "payments of any kind to any person in consideration for the rendering of any managerial, technical or consultancy services, including the provision of services by technical or other personnel." We have no hesitation in rejecting this contention. It cannot be said that ABB, Zurich has rendered any service of technical or consultancy nature to the applicant when it makes available to the applicant and other parties to the CC Agreement the results of corporate research. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 2: For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for - (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (v) the transfer of all or any rights (including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties i.e. those who are parties to the Agreement. As ABB Zurich administers the R D programmes, the signatories to the Agreement have identified it as the legal owner of intellectual property rights connected with the research results. ABB Zurich has no right to withhold the research information/ results from the participating group entities who are signatories to CCA. Even the grant of licence by ABB, Zurich is not contemplated. Every party to the CCA has a right flowing under the terms of the Agreement itself to avail of the fruits of research in its own right. Though the legal ownership of IPR rests with ABB Zurich as a matter of convenience and by mutual agreement, the beneficial ownership of the products of research belong to all those ABB group companies which have signed the CC Agreement. It is exactly for this purpose that the applicant and other parties to the Agreement contribute to the cost of research establishment set up for the benefit of all of them. The resources are pooled by all the entities which are parties to CCA to promote corporate R D for common benefit. The cost contribution formula is evolved so as to ensure the distribution of the burden of actual cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, then perhaps it might have been contended that payment were either royalty or hiring charges of the information as such could be treated as income. But the very fact that the technical data was jointly obtained and the expenses were shared together indicates that it could not be treated as income." 8.1. The ruling of this Authority in Decta vs. CIT (1996, 237 ITR 190) also supports the contention of the applicant. The question there was whether the amount of contribution received to recover part of the cost of technical assistance provided by the applicant within the framework of its aid programme to the Companies identified by it in India is the income of the applicant under the provisions of IT Act. The contention that the amount received was in the nature of fees for technical services was negatived. Adverting to the argument of the Department, it was observed in paragraph 12 as follows: "The case of the Department may appear, at first sight, to be covered by the definitions given above. There is no doubt that the DECTA provides various kinds of services to the companies with which it enters into Memoranda of Understanding and, if the contributions or amounts paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l services within the meaning of section 9 or article 13." 8.3. The ruling of this Authority in Danfoss Industries Ltd. (268 ITR 1) does not in any way support the plea of royalty. The crux of the ratio of that ruling is to be found in the following passages - "In that case, an agreement was entered into with a foreign company which provided for rendering services to its group of companies including the Indian Company (applicant). The services consisted of advice and assistance in market research and strategies, financial matters and customer relations. The consideration for availing of those services was a service fee based on the portion of the services the applicant's company received in relation to the total cost of the foreign company in providing such services. The question that was addressed by this Authority was whether the payment was in the nature of reimbursement of a portion of the actual expenditure incurred by the Singapore company and whether any income was embedded in it. The question was answered against the applicant. The following observations are crucial: "It is thus clear that there is no direct nexus between the actual costs incurred by the Danfoss Singa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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