Case of Authority for Advance Rulings, March 15, 2010 (case ABB Limited Vs Commissioner of Income-tax, (Large Tax Payer Unit))
| President | P.V. Reddi, J. (Chairman) and J. Khosla, Member |
| Resolution Date | March 15, 2010 |
Judgment:
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 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 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 coordinated 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.
2.1. 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 coordination fee is payable by each participating ABB entity to ABB Zurich for its role as administrator and coordinating 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.
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 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 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 cl.(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 program and the corresponding budget.
• Article 6.2 of the CCA in turn provides that the R&D Board...
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