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TMI Blog2012 (5) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... an allocation key. The participants are allowed a royalty-free unlimited access to the research results including any Intellectual Property Rights generated from the research and development. Though all are thus joint owners of the Intellectual Property Rights, the rights are registered in the name of the applicant. 2. The applicant approached this Authority essentially for a ruling whether payments made to the applicant by 'A' India, in terms of the Cost Allocation Agreement, can be treated as income in the hands of the applicant and whether it is not merely a reimbursement of the expenses incurred for the Research and Development. It also wanted to know, whether in any event, the payment can be treated as 'fees for technical services' or 'Royalty' as sought to be done by the Revenue. By order dated 12.9.2011, this Authority allowed the application under section 245R(2) of the Income-tax Act, to give a ruling on the following questions: 1. Whether pursuant to the Cost Allocation Agreement (CAA) the payments to be made by 'A' India Private Limited ("A India") to the Applicant, representing the 'A' India's share of the costs incurred towards Research and Development (" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies belonging to the group, including the applicant and the Indian subsidiary, are parties to the agreement. It is recited that the parties involved, work in a similar line of business and under similar conditions, certain functions and services are made available by the individual parties. For that reason, all parties can assume the role of service provider and the receiver of services. The agreement then sets out the duties of the service provider. In paragraph 1(1) the purpose of the agreement is said to be to ensure that the cost of services enumerated in section 2 of that agreement is allocated appropriately between all the companies in the group which are parties to that agreement. It is reiterated that in terms of the agreement, the contracting parties can be both service provider and service recipient. The applicant agrees to act as Administrator (clearing centre) of the settlement of that agreement. The activities of the service provider group company are restricted to advisory and economic support and it is not to encroach upon the decision-making powers of the manager or other decision makers. Clause 2 sets out the type of services. In terms of the agreement, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment costs was to be split according to the relative business sales by business unit of a company. 50% of the research and development costs was to be split according to the relative operating profits by business units of a company. Business unit of a company with negative operating profits, would be set with EURO- 0 for that part of the allocation. The contracting parties agree to accrue the cost allocation determined on the basis of the budget on a monthly basis. The contracting party providing the services was to draw a final statement until the end of the financial year at the latest on the basis of the actual costs of the previous financial year. The statement was to be submitted to the Administrator, viz. the applicant. Subsequent payments resulting from the final statement was to be paid by the contracting party receiving the services, on December 15 in the current year. Payments and reimbursements if not made in due time was to be subject to an interest rate of 2% above EURIBOR. The contracting parties, are to have a mutual right to information on the nature and scope of the services rendered in the year being billed. They are to have an audit report prepared which confir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a clear sharing of the costs of Research & Development, subject of course, to a credit being given for the amount spent by a particular party carrying on the Research & Development at its own expenses but for the benefit of all. What is the effect of this agreement, now remains to be considered. 7. The agreement contemplates the providing of services by one party to another of the parties to the agreement and the receipt of services by that other. While allocating costs, it provides that 'only those costs shall be taken into account which result from services rendered to the parties to this agreement'. So, the incurring of costs depends on the receipt of services from one of the contracting parties. What one has to look for is whether the parties share the costs of the 'research and development', the result of which is to be owned by all of them, irrespective of whether one uses it or not, before attributing common ownership. On the terms of the agreement, is it ownership of the title to the research or of the right to use it? One does not find a direct provision that the costs are shared by all. Even in the application, it is stated: "As per the CAA, the entire costs of the R& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led contribution for research and development was a mere façade to repatriate income from this country without paying tax and that should not be countenanced. On a scrutiny of the agreement it can be seen that it was not a case of investing in research and development but it was a case of a service provider and service receiver and payment made was for the service and it partook the character of fees for technical services or royalty. 9. Counsel for the applicant placed reliance on the Ruling in ABB Ltd. In re (322 ITR 564) to contend that the ratio of the said ruling would apply to this case and here also, the position is the same. On going through that ruling it can be seen that that was a case where the parties shared the expenses for the research and thereby became the joint owners of the product which they were entitled to share without payment of royalty. In the preamble to the agreement in the present case what is stated is that "All companies named above are companies belonging to the 'A' group. Given that the parties are involved in similar line of business and under similar conditions, certain functions and services are made available by the individual parties. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or reimbursement of a part of the expenses incurred for the research as and when it is completed. Since it is a payment for use and the payment depends solely on use, the payment can be understood only as royalty. 13. In view of our conclusions as above, we rule on question no. 1 that what is paid is royalty income in terms of the Act and the DTAC. We may notice that on the facts as set out, the applicant is only an 'administrator (clearing centre) of the settlement of the Cost Allocation Agreement as regards Research and Development. The income received is passed on to the concerned party to the agreement who has expended monies for the research and development. We feel that this question is relevant only as regards the actual receiver of the payment as per the so-called allocation key. 14. We have ruled that this payment would be royalty in terms of paragraph 3 of Article 12 of the DTAC and under section 9(1)(vi) of the Act. It will, hence, be royalty income liable to be taxed in India under Article 12.2 of the DTAC between India and Germany. Question no.2 is ruled on thus. 15. Questions nos. 3 and 4 stand answered in the light of our rulings on questions 1 and 2. The question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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