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2010 (3) TMI 111 - AAR - Income TaxCost contribution agreement Withholding tax u/s 195 DTAA with Government of the Swiss Confederation - 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)? Held that - The payments made to ABB Research Ltd., Zurich towards the applicant s share of the cost incurred in respect of R&D activities are not liable to be taxed under the Income Tax Act, 1961 as business income in the absence of permanent establishment in India, having regard to Art.7 of the Tax Treaty. Nor can it be subjected to tax as royalty or fees for technical services under Article 12 of the Treaty. - The applicant is not under an obligation to withhold the tax under Section 195 of the Act as the income is not chargeable to tax.
Issues Involved:
1. Whether payments made under the Cost Contribution Agreement (CCA) constitute "income" under Section 2(24) of the Income-tax Act, 1961. 2. Whether the payments are subject to withholding tax under Section 195 of the Act, considering the India-Swiss Tax Treaty. 3. Whether tax is required to be withheld on the entire payment if the cost contribution payment and coordination fee are raised under a single invoice. Detailed Analysis: Issue 1: Income under Section 2(24) of the Income-tax Act, 1961 The applicant, ABB Limited, proposed to enter into a Cost Contribution Agreement (CCA) with ABB Research Limited, Zurich, for sharing costs incurred towards basic Research and Development (R&D) activities. The applicant contended that the payments made under the CCA represent a reimbursement of costs and do not constitute income. The Authority for Advance Rulings (AAR) agreed, noting that the payments are for pooling and coordinating R&D costs, which are shared among participating ABB entities. The payments are not for any services or royalty, but merely a reimbursement of expenses, and thus do not constitute income under Section 2(24) of the Income-tax Act, 1961. Issue 2: Withholding Tax under Section 195 and the India-Swiss Tax Treaty The AAR examined whether the payments could be considered business income, royalties, or fees for technical services under the India-Swiss Tax Treaty. The AAR concluded that even if the payments were considered business income, they would not be taxable in India due to the absence of a Permanent Establishment (PE) of ABB Zurich in India, as required by Article 7 of the Tax Treaty. The AAR also rejected the Revenue's contention that the payments fall under 'fees for technical services' (FTS), as defined in Article 12.4 of the Treaty, since ABB Zurich did not render any technical or consultancy services to the applicant. The AAR further determined that the payments could not be considered royalties under Article 12.3 of the Treaty, as ABB Zurich did not receive consideration for transferring or conferring any intellectual property rights. Therefore, the applicant is not obligated to withhold tax under Section 195 of the Act. Issue 3: Withholding Tax on Coordination Fee The AAR ruled that the applicant is required to withhold tax on the coordination fee paid to ABB Zurich, even if it is covered by a single invoice along with the cost contribution payment. The coordination fee is considered a separate payment for services rendered by ABB Zurich as a coordinating agency. Conclusion: 1. Payments under CCA: The payments made to ABB Zurich towards the applicant's share of R&D costs are not liable to be taxed as business income, royalties, or fees for technical services under the Income Tax Act, 1961, or the India-Swiss Tax Treaty. 2. Withholding Tax: The applicant is not required to withhold tax under Section 195 for the cost contribution payments, as these are not chargeable to tax. 3. Coordination Fee: The applicant must withhold tax on the coordination fee, even if it is included in a single invoice with the cost contribution payment. The ruling was pronounced on March 15, 2010.
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