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New Page 1Part C : Tribunal &
AAR International Tax Decisions
6 ABB Limited
(2010) TIOL 94 ARA-IT
S. 2(24), S. 195 of the Income-tax Act,
Articles 5 & 7 of India-Switzerland DTAA
Dated : 15-3-2010
Payments made towards the share of the cost incurred in
respect of research and development activities pursuant to cost contribution
arrangement (CCA) is not the payment towards fees for technical services or
royalty. Such contribution is not liable to tax in the hands of the co-ordinating
agency.
There is no obligation of tax withholding if the amount does
not represent income chargeable to tax.
Facts :
The applicant is a company incorporated in India and part of
the ABB Group, which is a leader in power and automation technologies. The Group
has presence in more than 100 countries.
As per Group’s R&D policy, all basic R&D is coordinated and
directed through group entity in Switzerland (Swissco).
The group entities who wish to participate in basic R&D enter
into a CCA with Swissco. As per the terms of CCA, the entire costs of basic R&D
is shared amongst the participants based on a pre-agreed allocation key. The
participating entities are allowed a royalty-free unlimited access to the
research results, including any Intellectual Property Rights (IPRs) generated
from basic R&D. Any revenue earned from third party is reduced from the total
cost recovered from the participants. The research programme and policy is
decided by the research Board which has nominee from the participating entities.
The research Board decides on the research to be undertaken, the budgeted cost,
recovery to be made from various participants based on budget and adjustment to
be made based on the actual cost incurred and third-party revenue earned, etc.
The research Board gets the research carried out through various research
centres to whom the remuneration is paid on cost plus basis.
CCA made it clear that though the economic benefits of
research vest in various participants, for administrative reasons and
convenience, the IPRs generated are legally registered in the name of Swissco.
In addition to the cost contribution payments, each
participant also paid a ‘coordination fee’ to Swissco for its role as
administrator and coordinating agency under the CCA. Such fee was accepted to be
chargeable to tax in India and no question was raised on taxability of such
amount.
The applicant sought the ruling on the tax implications of
the contributions proposed to be made to Swissco. The primary contentions of the
applicant before the AAR were (i) that the CCA was merely a pooling and
coordinating arrangement and represented reimbursement of actual cost incurred
in carrying out the research jointly; (ii) the contribution did not partake the
character of income and was, therefore, not chargeable to tax in India; and
(iii) even if the contribution constituted income, it represented business
income of Swissco, which in absence of PE in India, was not chargeable to tax.
AAR held :
-
The payments made to
Swissco are not in the nature of FTS since Swissco had not rendered any
managerial, technical or consultancy service to the participants of CCA.
Swissco did not deploy any personnel to perform any services in India.
-
The contribution was not
payment on account of royalty. It is true that research results in creation of
IPR in the form of information, technical knowledge and experience. However,
payment made to Swissco was not for getting rights to such IPRs. The contract
research organisation through whom the research board got the research carried
out merely works as contractor without retaining IPR or right to commercial
exploitation of the research.
-
Even though the IPRs
generated from the research were to be registered in the name of Swissco,
their economic benefits and beneficial ownership vested in the contributories.
Admittedly, all participants had royalty-free and perpetual access to IPR.
Also, amounts received from third party or from exploitation of IPR reduced
the cost of the research to the participants. The arrangement was thus for the
benefit of all the participants where the resources were pooled by various
participants for undertaking R&D for common benefit.
-
The arrangement was such
that each participant reimbursed the actual cost incurred by making the
proportionate contribution. The OECD Guidelines on CCA arrangement also makes
it clear that each participant is effective owner of the IPR generated through
common pool and hence the contribution is not royalty paid to any other
person.
-
The amount of
reimbursement was not chargeable to tax in India and consequentially not
liable to TDS.
-
The AAR clarified that
its decision on non-taxability however does not preclude enquiry in
appropriate proceedings about the nature of contribution on an armed-length
basis.
