Case Law Details
Case Name : ABB Limited- AAR No. 834 of 2009
Appeal Number : 15/03/2010
Date of Judgement/Order :
Related Assessment Year :
- ABB Limited, an Indian company (ABB India) and ABB Research Limited, Zurich, a Swiss company (ABB Zurich) are part of the ABB group. The group is engaged in the manufacturing of power products and systems technologies and has business activities across the globe in over 100 countries.
- As a cost reduction strategy, all the basic research and development (R&D) for the ABB Group is coordinated and directed through ABB Zurich.
- ABB group entities who wish to participate in the basic R&D have to enter into a Cost Contribution Agreement (CCA) with ABB Zurich. ABB India is proposing to enter into CCA with ABB Zurich.
- Pursuant to the CCA, entire costs of the basic R&D are shared between ABB entities participating in CCA on the basis of an allocation key. Further, participating ABB entities are allowed a royalty-free unlimited access to the R&D results including any Intellectual Property Rights (IPR) generated from the basic R&D.
- For administrative reasons, the IPR generated would be legally owned by ABB Zurich.
- The R&D activities are performed within the group through Corporate Research Centres (CRC) in various countries and such CRCs are remunerated on a cost plus.
- A fee received by ABB Zurich from licensing of IPR helps to reduce the overall cost of the R&D.
- In addition to the reimbursement of costs, each ABB participating entity is liable to pay co-ordination fee to ABB Zurich for its role as administrator and coordinating agency.
- None of the personnel of ABB Zurich visits India for rendering any work in this regard; and
- ABB Zurich does not have a Permanent Establishment (PE) in India. Issues before the AAR
- Whether the payments (in the form of reimbursement of expenses) made by ABB India to ABB Zurich representing ABB India?s share of cost incurred by ABB Zurich towards basic R&D activities would consttute income in the hands of ABB Zurich and be liable to tax in India?
- Whether ABB India would have to withhold taxes under section 195 of the Income Tax Act, 1961 (ITA) even in the absence of a PE of ABB Zurich in India?
- Whether taxes are 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?
Contentions of the Assessee
- The proposed cost contribution by ABB India as a participant to the CCA represents reimbursement of the costs incurred by ABB Zurich towards basic R&D. The results of such R&D are freely accessible by ABB India without any further payment.
- ABB entities participating in the CCA are „economic owners? of the research results including any IPRs generated under the CCA. 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.
- 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 credited to a joint account from which the basic R&D expenses are met.
- Mere reimbursement of expenses cannot be construed as a receipt bearing the characteristics of income.
- Therefore, the proposed payment to ABB Zurich does not include any income liable to be taxed in India.
- Even if it is treated as income in the hands of ABB Zurich, it would be in the nature of business income governed by Article 7 of the Indo- Swiss treaty and taxable based on the permanent establishment principle.
- In this regard, since ABB Zurich does not have a PE in India, the income is precluded from being subjected to tax in India.
- ABB India accepted that the co-ordination fee would be chargeable to tax in India which would obligate it to withhold tax in India under section 195 of the ITA.
Contentions of the Revenue
- The payment to ABB Zurich to ABB India is in the nature of fees for technical services which includes 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.
Ruling of the AAR
- The payment cannot constitute fees for technical services as ABB Zurich has not rendered any service in the nature of technical or consultancy to ABB India when it would make available results of corporate research to ABB India and other participants under CCA;
- There is no payment being made by the ABB India to ABB Zurich in consideration of the conferment of any rights and therefore the payment does not constitute royalty in the hands of ABB Zurich;
- The beneficial ownership of the IPR always remained with participating entities of CCA. Further, ABB Zurich has no right to withhold the results emulating from the basic R&D activities from the participating entities who are signatories to CCA and even the grant of license by ABB Zurich is not contemplated under the scenario as the right flows under the terms of CCA itself to the ABB group entities to avail of the fruits of research in its own right. Therefore, the payments cannot be construed to be in the nature of royalties.
- The fact that R&D information can only be accessed by the signatories to CCA and the license income derived by the limited commercial exploitation of IPR 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 endeavor to reap the benefits of research conducted by an organized set up of group.
- The AAR concluded that the transaction is not subject to withholding tax as costs reimbursed based on the cost sharing arrangements between ABB India and ABB Zurich is not chargeable to tax.
- The AAR further held that ABB India is under the obligation of withholding taxes in respect of coordination fee only although the cost contribution payment and coordination fee are covered under a single invoice but identified separately.
Source: ABB Limited – AAR No. 834 of 2009 dated 15 March 2010.