2017 (4) TMI 869 - AT - Income Tax

TDS u/s 195 - payment made to KPMG International, Switzerland without TDS - principle of Mutuality application - Indian-Switzerland tax treaty - Held that - There is a complete identity between the contributors and participators; the actions of the participators and contributors are in furtherance of the mandate of the association. There seems be no element of profit by the contributors from a fund made by them, which could only be expended or returned to themselves. Based on these conditions case of the assessee falls within the four corner of the ambit of the Principle of Mutuality . Thus, we do not find any reason or ground to interfere in the order passed by learned Commissioner (Appeals) hence the appeal filed by the revenue is dismissed.

Issues Involved:
1. Whether KPMG International is a mutual association and its receipts are not chargeable to tax.
2. Whether the expenses incurred by the assessee towards reimbursement of costs to KPMG International are in the nature of royalty under section 9(1)(vi) of the Income Tax Act.
3. Whether the remittances made to KPMG International constitute income chargeable to tax under section 195 of the Income Tax Act.
4. Whether the payments made for names, marks, and other facilities to KPMG International are in the nature of royalty and chargeable to tax in India.
5. Whether the principle of mutuality applies to the remittances made by the assessee to KPMG International.
6. Whether the remittances are in the nature of business income not taxable in India under Article 7 of the India-Switzerland Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

1. Mutual Association and Taxability:
The Revenue contended that KPMG International is not a mutual association and its receipts are chargeable to tax. The assessee argued that KPMG International is a mutual association, and the receipts are membership contributions constituting business income not taxable in India under Article 7 of the India-Switzerland DTAA. The Tribunal upheld the CIT(A)'s finding that KPMG International is a mutual association and its receipts do not constitute income chargeable to tax. The Tribunal concluded that the principle of mutuality applies as there is a complete identity between the contributors and the participators, and the actions of the participators and contributors are in furtherance of the mandate of the association.

2. Nature of Reimbursement of Costs:
The AO concluded that the expenses incurred by the assessee towards reimbursement of costs to KPMG International are in the nature of royalty under section 9(1)(vi) of the Act. The assessee contended that the payments were reimbursements of costs and not income chargeable to tax. The Tribunal upheld the CIT(A)'s decision that the reimbursements are not in the nature of royalty. The Tribunal noted that KPMG International operates on a no-profit, no-loss model, and the reimbursements are based on the actual costs incurred without any markup.

3. Remittances and Tax Deduction at Source:
The AO held that the remittances made by the assessee to KPMG International constitute income chargeable to tax under section 195 of the Act, and therefore, tax was liable to be deducted at source. The Tribunal upheld the CIT(A)'s decision that the remittances do not constitute income chargeable to tax, and the assessee was not obliged to withhold any tax on such receipts. The Tribunal emphasized the principle of mutuality and concluded that the remittances were reimbursements of costs and not income.

4. Payments for Names, Marks, and Other Facilities:
The AO argued that the payments made by the assessee to KPMG International for names, marks, and other facilities were in the nature of royalty and chargeable to tax in India. The Tribunal upheld the CIT(A)'s decision that the payments were not in the nature of royalty but were reimbursements of costs incurred by KPMG International in providing services to its member firms. The Tribunal noted that the payments were made to maintain consistent standards and methodologies across member firms, and there was no element of profit involved.

5. Principle of Mutuality:
The Tribunal extensively discussed the principle of mutuality and its applicability to the case. The Tribunal referred to various judicial precedents and concluded that the principle of mutuality applies to the remittances made by the assessee to KPMG International. The Tribunal noted that there is a complete identity between the contributors and the participators, and the actions of the participators and contributors are in furtherance of the mandate of the association. The Tribunal emphasized that there is no element of profit involved, and the funds are used for the benefit of the members.

6. Business Income and DTAA:
The assessee argued that the remittances made to KPMG International are in the nature of business income not taxable in India under Article 7 of the India-Switzerland DTAA. The Tribunal upheld the CIT(A)'s decision that the remittances are not taxable in India as business income under the DTAA. The Tribunal noted that KPMG International does not have a permanent establishment in India, and the remittances are reimbursements of costs incurred in providing services to member firms.

Conclusion:
The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision that KPMG International is a mutual association, and the remittances made by the assessee are reimbursements of costs not chargeable to tax. The Tribunal also dismissed the assessee's cross-objection as infructuous. The order was pronounced on 07th April 2017.

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