Mere reimbursement of costs based on a cost sharing agreement not liable to withholding tax

Facts

• 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