2023 (10) TMI 923 - HC - Income Tax

Doctrine of mutuality - satisfaction of three tests - Assessment of Verein registered as not-for-profit entity under the Swiss laws - Fees for technical services - framework of the Verein vis a vis its member firms - assessee is an association (Verein), established in Switzerland, with its members being Chartered Accountant firms situated across the world - whether recoveries made by the respondent/assessee Verein from its members could not be held to be in the nature of trading receipts? - HELD THAT - As in the present case, as reflected from various Articles of Verein, it has been established with domicile in Zurich, Switzerland and consists of members that are Chartered Accountant firms engaged in rendering professional services in the fields of accounting, audit, insolvency, law, management, consulting etc. There are elaborate provisions in the Articles of Verein which prescribe the duties of member firms to Verein and vice versa as well as obligations of member firms to each other. Merely because members of Verein are able to avail various technological services and license to use goodwill of Verein, their contributions cannot be regarded as quid pro quo. The Articles of Verein clearly show that all member firms of Verein come together and contribute to a common fund for achieving common objectives, which objectives qua Verein are non-commercial objectives and that all member firms contribute towards budgeted operating expenses of Verein and are entitled to proportionate share in the surplus lying with Verein in case of dissolution. Nothing in the Articles of Verein even feebly indicates any commercial nexus between the contributions and benefits enjoyed by its member firms. There is, thus, a complete identity between contributors and participants. Consequently, the first test of mutuality stands satisfied. Second test of mutuality is non-profiteering - As held in the case of Yum Restaurants 2020 (4) TMI 827 - SUPREME COURT the mutuality and non-profiteering character of the concern are to be determined in the light of its actual working structure; and the factum of corporation or incorporation or the firm in which it is clothed is immaterial. Therefore, one has to examine the actual framework of the Verein vis a vis its member firms. Read in entirety, the Articles of Verein clearly convey that it is formed for the benefits of the members by allowing them to be identified as members of the Verein so as to assure their respective clients of certain standards. The ultimate object of Verein is to benefit its member firms with the goodwill of the Verein as a whole, to which they add with their individual professional excellence on the basis of shared information and expenses in the field of their profession. Thus, the sole objective of the Verein is to benefit its members in lieu of subscription to evolve better professional practices.That being so, non-profiteering, the second test of mutuality also stands satisfied. Third test of mutuality is obedience to the mandate of the association for convenience and benefit of its contributors and participators - The expression mutuality flows from the expression mutual , which indicates reciprocity of arrangement in which the concerned parties have reciprocal rights or understanding or arrangement to abide by the mandate of the group for benefit of other members. And such arrangement is unlike an arrangement in which one member would be subjected to the absolute discretion of another in such a manner that the entire liability may fall upon one whereas benefits are reaped by all or all others. In a mutual concern, an obligation to pay may or may not be there but at the same time, an over ridding discretion of one member over others cannot be sustained in order to preserve the real essence of mutuality. In other words, the association created should operate only for the convenience and benefit of its members. Article 6.2(a) of the Articles of Verein mandates that in addition to all obligations, each member firm under the Articles, the supplemental regulation or otherwise shall support and adhere to the purposes and policies of the Verein; align national plans, strategies and operations with global plans strategies and operations in consultation with Verein Management; conduct itself in such a manner as to advance the reputation of the Verein; be bound by the requirements contained in resolution and protocols adopted by the Board of Directors or the governing bodies consistent with the Articles of Verein and supplemental regulations qua professional standards and methodologies, governance of the Verein and systems for quality control and risk management and other matters specified in or pursuant to the supplemental regulations. Article 6.2(b) stipulates that if due to local laws, any member firm is unable to comply with any of the provisions of the Articles or supplemental regulations or any other obligation undertaken in connection with membership of Verein it shall promptly inform the Verein of the particulars so that Verein may waive compliance or establish alternate requirement. Thus, third test of mutuality also stands satisfied in the present case. All three tests of mutuality having been satisfied as aforesaid, we are of the considered view that the receipts of the respondent/assessee Verein from its members were not in the nature of fees for technical services and that the same were exempt from tax having regard to the principle of mutuality . Accordingly, the substantial question of law framed above is answered in favour of the respondent/assessee and against the appellant/revenue. The order of the Tribunal, impugned in the present appeals is upheld and accordingly, the appeals stand disposed of.

Summary

Issues Involved:
1. Whether the receipts of the assessee were in the nature of fees for technical services.
2. Whether the receipts were exempt from tax based on the principle of mutuality.

Summary:

Issue 1: Nature of Receipts as Fees for Technical Services
The appellant/revenue argued that the receipts from the respondent/assessee, an association (Verein) established in Switzerland, were in the nature of fees for technical services. They claimed that the services provided by the Verein, such as information technology-related services and software licenses, were commercially exploited by its members, making the subscription fees taxable. The appellant/revenue relied on judgments like Yum Restaurants (Marketing) Pvt Ltd vs Commissioner of Income Tax and Haryana State Co-op Labour & Construction Federation Ltd vs CIT to support their stance.

Issue 2: Exemption Based on the Principle of Mutuality
The respondent/assessee contended that the receipts were exempt from tax under the principle of mutuality, as the Verein was a non-profit entity registered under Swiss laws. The Tribunal upheld this view, stating that the Verein operated on mutuality principles, where contributions from members were not trading receipts but were for common objectives. The Tribunal's decision was based on the Articles of Verein, which showed that all member firms contributed to a common fund for non-commercial objectives and were entitled to a proportionate share in the surplus upon dissolution. The Tribunal referenced judgments such as CIT vs Bankipur Club Ltd and Chelmsford Club vs CIT to support the mutuality principle.

Judgment:
The High Court affirmed the Tribunal's decision, concluding that the receipts from the respondent/assessee were not fees for technical services but were exempt from tax based on the principle of mutuality. The Court found that all three tests of mutuality'common identity, non-profiteering, and obedience to the mandate'were satisfied. The substantial question of law was answered in favor of the respondent/assessee, and the appeals were disposed of accordingly.