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2022 (5) TMI 896 - AT - Income TaxIncome deemed to accrue or arise in India - Receipts of assessee in nature FTS - principle of mutuality - source of generating funds for the assessee - Whether the assessee received any payment from non-resident in connection with business of non-resident in India? - news reports that the Verein (Association) got converted into the Private Limited UK Company as limited by guarantee and thus the ld. AO taxed all receipts in the hands of assessee on gross basis as fee for technical services - test of commonality of identity between the members or participators in the mutual concern and the beneficiaries - HELD THAT - As relevant Articles of the Verein and principles of law as with regard to the question as to if the assessee was operating on the concept of mutuality, the first thing that can be observed is that the Tax Residency Certificate in favour of the assessee issued by authorities specifically mention that the source of income of the assessee is subscription fee. The Collins dictionary defines Subscription as A subscription is an amount of money that you pay regularly in order to belong to an organization, to help a charity or campaign, or to receive copies of a magazine or newspaper. The Black s Law Dictionary defines Subscription as The act of writing one's name under a written instrument; the affixing one's signature to any document, whether for the purpose of authenticating or attesting it, of adopting its terms as one's own expressions, or of binding one's self by an engagement which it contains. Thus without importing any other meaning and rational to the meaning of subscription and same being the only source of income of the Verein, as recognized by the relevant tax authorities, it can be concluded that the only source of generating funds for the assessee was the subscription amount from its members determined on the basis of proposed annual expenditure, which were paid by member firms, being subscribers to the Articles of Verein. Then the invoices for the relevant year placed on record also show that the invoices were primarily raised for subscription according to Articles of Verein on account of operating expenditure, technology subscription or miscellaneous expenditure. The invoices are also raised for specific events organised and conducted by the assessee in furtherance of its recognised scope of activities and for the benefit of the Member Firms or the profession itself as a whole. These have been duly considered by the ld. F.A.A. while holding that no services were specifically provided by the assessee to its member in the nature of trading and the receipts were not in the nature of trading receipt. The Bench is of the considered opinion that the contributions in the form of Operational Subscription, Technology subscription and Miscellaneous subscription, were only indicative of the three heads of subscription. The contributions were to be made by Member Firms for total budgeted operating expenses . Mere name of a head for contribution is not consequential to term the activity for which such contribution is made to be in nature of services as trading or technical services. It is the prospective beneficiaries and the benefit that is relevant. The prospective beneficiaries here were only the Member Firms of the Verein and tangible benefit derived from activities for which contribution was received was merely pursuit of excellence of the Member Firms in professional field. FAA has rightly concluded that these contributions were in the nature of reimbursements. As, they were pre determined on basis of budgeted expenditure. There is certainly force in the contention of Ld Senior Counsel for the assessee that in any case allowing the contributions as reimbursement should have been a separate ground of challenge in appeal which has not been taken by the Revenue. AO failed to appreciate that the Section 1 of the Verein, document defined international name , international practice name , related names and Section 2.1 gave Member firms right to use these names and Section 2.2 provided certain responsibilities. These clauses establish that the Verein was formed for the benefit of the members to allow them being identified as member of the Verein in assuring their clients of certain professional standards being followed by the Member Firm. The only benefit members drive by way of paying subscription is to have benefit of the goodwill of the Verein as a whole, to which they are also members and adding to the goodwill, in terms of professional excellence on basis of shared information and experiences in the field of profession. The only objective of the Verein thus was to benefit its member in the professional field and to evolve better professional practices. Verein was established for specific purposes mentioned in Article 1.2 and they nowhere indicate that any element of commerciality between the members themselves or by the members of the Verein and Verein itself with any outside members or clients was directly possible. Special reference can be made to Article 7.5 which provides that Verein shall not provide services to clients or direct or control the manner in which each member firm provides audit for other services to its clients and the Verein shall not share in the profit and losses of the member firms. The manner in which the funds for the activities of the Verein were to be collected by way of contribution as per article 7.1, limiting financial obligations of the member firms to the Verein to the extent of annual contributions towards budgeted operating expenses as per article 7.4 and the distribution of funds on dissolution of the Verein or withdrawal or expulsion of the member firm from the Verein as per Article 11.2 firmly indicate that the Verein was working on principles of mutuality and not in a commercial venture on quid pro quo basis.. As with regard to the findings of the ld. AO on the basis of news reports that Verein has converted into the private company with limited guarantee the same being on hearsay had no evidentiary value. Though, on behalf of the assessee it has been submitted that another entity has come into existence for the purpose of certain local laws which has no concern with the present assessee. The activities of the Verein were certainly not for social cause and cultural cause but pursuit of excellence in professional field is no less a noble cause. The services may be customized and focused but are not special services in the sense that their utility is not restricted to few beneficiaries but across board all the member firms and substantially the profession as a whole is the beneficiary. The use of technology for benefit of all member firms commensurate with the scope and objectives of the Verein. The subscription charges cannot be said to be consideration for any specific service performed or for some specific members. Hon ble Madras High Court in the case of South Indian Films Chambers of Commerce 1981, 129 ITR 22 (Madras) has held that provisions of Section 28(iii) of the Act will not be attracted in a case where profit making was only incidental and not the means of achieving the main objects. In the case in hand rather there is no element of profit making by the assessee from its member firms or non-members. Verein was functional on the principles of mutuality which Ld. Assessing Officer failed to appreciate while Ld. Ld. First Appellate Authority corrected the same in appeal. The element of commonality of identity between the Member Firms, in the mutual concern to evolve better professional practices. The completeness of identity between the member Firms due to contributions of Member Firms being only source of meeting expenditure for running the Verein and for activities of Verein and Non-profiteering, while obedience to mandate of the Verien are established from the matter on record. Thus no fault can be found, on facts or law, in the findings of Ld FAA and there is no substance in the grounds of appeal raised by the Revenue.
Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) 2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland 3. Nature of receipts (subscription fees) and their taxability 4. Principle of mutuality and its applicability 5. Reimbursement nature of receipts Detailed Analysis: 1. Jurisdiction of the Assessing Officer (AO): The assessee challenged the jurisdiction of the AO for the assessment year 2008-09, claiming that it should be assessed in Mumbai. The AO held that jurisdiction was applicable in Delhi as the assessee did not contend that no source of income was in Delhi. This was followed in subsequent years. Before the First Appellate Authority (FAA), the assessee agreed not to press on the jurisdiction issue if due justice was extended. 2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland: The AO argued that if the assessee was a non-profit organization not taxable in Switzerland, then the provisions of DTAA should not apply. The assessee contended that it had provided all necessary documents to prove its non-profit status and eligibility for DTAA benefits. The FAA confirmed that the necessary documents were provided, and the assessee was recognized as a non-profit entity by Swiss Tax Authorities. 3. Nature of Receipts (Subscription Fees) and Their Taxability: The AO treated the subscription fees received by the assessee from its member firms as income from technical services, taxable on a gross basis. The AO did not accept the assessee's claim that these were reimbursements and exempt under the principle of mutuality. The FAA, however, considered the payments as reimbursements covered by the principle of mutuality and not taxable as fees for technical services. 4. Principle of Mutuality and Its Applicability: The AO argued that the assessee's activities were in the nature of trade with its members, thus not qualifying for the principle of mutuality. The FAA, on the other hand, held that the assessee was functioning on the principles of mutuality, as its activities were for the benefit of its members, with contributions used to meet operating expenses. The FAA relied on various judicial precedents to support this conclusion. The Tribunal upheld the FAA's finding that the assessee operated on the principle of mutuality, emphasizing that the contributions were for budgeted operating expenses and not for commercial profit. 5. Reimbursement Nature of Receipts: The AO did not accept the assessee's claim that the payments were reimbursements, treating them instead as revenue for services rendered. The FAA, however, held that the receipts were in the nature of reimbursements and exempt from taxation under the principle of mutuality. The Tribunal noted that the FAA's finding on this matter was not specifically challenged by the Revenue, thus supporting the FAA's conclusion. Conclusion: The Tribunal dismissed the Revenue's appeals, upholding the FAA's order that the receipts were not in the nature of fees for technical services and were exempt from tax under the principle of mutuality. The cross objections by the assessee were dismissed as infructuous. The Tribunal emphasized that the assessee provided necessary documents to prove its non-profit status, and the contributions were for budgeted operating expenses, supporting the principle of mutuality. The order was pronounced on April 11, 2022.
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