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TMI Blog2012 (5) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... terials and supervision of installation for various automobile companies. A group of companies, hereinafter referred to as the "A" group are its affiliate's. The group has formulated a research and development policy. As per that policy, all Research and Development activities for the ' A' group is coordinated through the applicant. 'A" entities who wish to participate in the Research and Development, enter into a Cost Allocation Agreement. That agreement provides that the Research and Development will be undertaken by any or all parties to it with a stipulation that the applicant is the administrator under the agreement The entire cost of the research is to be shared by the parties to the agreement based on an allocation key. The participants are allowed a royalty-free unlimited access to the research results including any Intellectual Property Rights generated from the research and development. Though all are thus joint owners of the Intellectual Property Rights, the rights are registered in the name of the applicant. 2 . The applicant approached this Authority essentially for a ruling whether payments made to the applicant by 'A' India, in terms of the Cost Allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Income" or "Fees for Technical Services", then whether the same is taxable as "Royalty" under the Income-tax Act read with the India-Germany Tax Treaty? 6. Based on the answers to the above queries what is the rate and on what amount should the tax be deducted at source by 'A' India on the payments made under CAA to the Applicant? 3. We may now consider the Costs Allocation Agreement relied on by the applicant. It is described as a revised agreement which supersedes an earlier agreement dated 1.1.2004. The revised agreement is concluded with effect from 1.1.2008. The applicant is party no. 1 to that agreement. Its 100% Indian subsidiary is party no. 15. Altogether, 24 companies belonging to the group, including the applicant and the Indian subsidiary, are parties to the agreement. It is recited that the parties involved, work in a similar line of business and under similar conditions, certain functions and services are made available by the individual parties. For that reason, all parties can assume the role of service provider and the receiver of services. The agreement then sets out the duties of the service provider. In paragraph 1(1) the purpose of the agreement is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ped results will be netted against the 'Research Development pool's costs' and will be shared in proportion to the anticipated direct benefits. As the amount of actual costs would only be known following the close of the performing party's financial year, monthly accruals of 1/12 of the yearly amount was to be initially recorded based on the budget prepared by the parties rendering the services before the beginning of the financial year. The allocation formula set out therein which reflected the actual benefit has to be reviewed annually and was to be adjusted and if necessary was to be used as the basis for the services. For Research Development, 50% of the research and development costs was to be split according to the relative business sales by business unit of a company. 50% of the research and development costs was to be split according to the relative operating profits by business units of a company. Business unit of a company with negative operating profits, would be set with EURO- 0 for that part of the allocation. The contracting parties agree to accrue the cost allocation determined on the basis of the budget on a monthly basis. The contracting party providing the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeded, the changes compared to the Budget have to be presented before the Budget value is over-run, explained and got approved. The non-approved budget or budget over-runs are not considered within the framework of the cost allocation. 6. No doubt, this agreement contemplates the grant to each other by the parties, the right to exploit any technology developed under the agreement within their respective geographic regions. It also does provide for allocation of costs of the individual parties of the group ascertained as provided in the agreement. The cost allocation seems to be dependant on the rendering of services by one and the receipt of service by the other. It is not seen to be a clear sharing of the costs of Research Development, subject of course, to a credit being given for the amount spent by a particular party carrying on the Research Development at its own expenses but for the benefit of all. What is the effect of this agreement, now remains to be considered. 7. The agreement contemplates the providing of services by one party to another of the parties to the agreement and the receipt of services by that other. While allocating costs, it provides that 'o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user by the party of the product is without payment of any royalty. It is reiterated that the ruling is sought only on payment for research and development covered by Exhibit 1 in the agreement. On behalf of the revenue it is submitted that the present agreement is merely a renewal of the earlier agreement of the year 2004 and in terms of that agreement the Indian subsidiary of the applicant was regularly withholding tax and there was no occasion for the applicant to approach this Authority. As a matter of fact the present application was hit by clause (i) of the proviso to Sec 245 R (2) of the Income-tax Act. The Indian subsidiary was merely an erection contractor. It did no research. Its so called contribution for research and development was a mere fa ade to repatriate income from this country without paying tax and that should not be countenanced. On a scrutiny of the agreement it can be seen that it was not a case of investing in research and development but it was a case of a service provider and service receiver and payment made was for the service and it partook the character of fees for technical services or royalty. 9 . Counsel for the applicant placed reliance on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he applicant is either the recipient of the consideration or the conduit through which the consideration is paid to the concerned party. 11. Paragraph 3 of Article 12 of the DTAC between India and Germany defines royalty. As far as the use of a secret formula or process and the use of information concerning industrial, commercial or scientific experience is concerned, it does not differ significantly from the definition in the Act. Hence, what is paid for by ' A" India to the applicant under the agreement would be royalty. 12. The theory of reimbursement propounded cannot stand. The payment occurs only when the process or scientific experience is used by a member. It is not a sharing of costs or reimbursement of a part of the expenses incurred for the research as and when it is completed. Since it is a payment for use and the payment depends solely on use, the payment can be understood only as royalty. 13. In view of our conclusions as above, we rule on question no. 1 that what is paid is royalty income in terms of the Act and the DTAC. We may notice that on the facts as set out, the applicant is only an 'administrator (clearing centre) of the settlement of the Cost Al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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