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TMI Blog2010 (3) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-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 coordination fee are raised under a single invoice by ABB Zurich though identified separately? 2. 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 uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 3. 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 separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows: 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 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 cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. From the statement of facts and the contents of the CCA, it is clear that rendering of any service of the nature of managerial, technical or consultancy is not involved and moreover, ABB Zurich does not deploy any personnel to perform any services in India. Therefore, the only question that deserves consideration is whether the payments made by the applicant to ABB Zurich can be treated as payments in the nature of royalty. 6.1 The expression 'royalties' has been defined in para 3 of Art.12 as follows:- "3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, any industrial, commercial, or scientific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. 7. We do not think that any payment is being made by the applicant to ABB Zurich in consideration of the conferment of any rights in respect of any of the items enumerated in the said definition clauses. These are broadly intellectual property rights. 'Information' is defined in CCA as "the knowledge (data, technical documents, experience). The information obtained by the applicant as a result of corporate R&D envisaged by the Agreement would normally fall within the definition clause. For instance, it could be "information concerning industrial or scientific experience". But, the question is whether ABB Zurich or the CRCs would be receiving the consideration for transferring or conferring such r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tities 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 amongst the participating entities. The fact that R&D information can only be accessed by the parties to CCA and the further fact that the licensed income derived by the limited commercial exploitation of IPR as per cl.7.5 would go to reduce the amount which the participants would have to contribute are clear pointers that an internal arrangement has been evolved by the participating group entities through a joint endeavour to reap the benefits of research conducted by an organized set up of R&D Board consisting inter alia of the representatives of those entities. It is clear, as stated by the applicant, that ABB Zurich merely acts as a coordinating agency for the purpose of recouping the costs that are contributed by the various participants and acts as a medium for organizing and providing the CRCs with the funds for the research that is carried out. For the services rendered by ABB Zurich as a coordinating agency, it gets 'coordination fee' the taxability of which is not under dispute in this applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 companies into the account of the DECTA with the Standard Chartered Bank really represent the consideration for the services so rendered, then the amount thereof will be clearly taxable as income in India, both by virtue of section 9(1)(vii) as well as by virtue of article 13(4) of the DTAA. But the real and crucial question is whether the payments made are capable of being described as the consideration for the services rendered by DECTA. One way of looking at the transaction is that, on the one hand, DECTA provides some services to the companies and towards those services the companies make a cash payment. The cash payment may not be equivalent to the cost of the services rendered but it can be said that it is nonetheless a consideration for the services rendered. It was open to DECTA to have offered these services for nothing as it used to do once. It is equally open to DECTA to charge full consideration for these services or even a consideration that generates profit for itself. The fact that DECTA has cho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Singapore in providing the said services to a Danfoss group company and the fees payable by each individual company which avails of the services. In the absence of the break-up of the cost incurred by Danfoss Singapore in providing such services and fees payable by each individual company, the aforementioned conclusion, in our view, is unassailable. It is, therefore, not possible to conclude that the service fee payable by the applicant is nothing but reimbursement of costs incurred by Danfoss in providing services to the applicant." It was mainly on that finding that the applicant's contention was rejected. Referring to Dunlop Rubber case (supra) the distinguishing feature was pointed out as follows:- "That was not the case of the assessee-company providing services to an Indian company on payment of consideration in the form of service fees as in the present case. In that case both the assessee-company and the Indian company were beneficiaries of the research conducted as a joint venture. In the instant case the appl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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