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TMI Blog2022 (5) TMI 896X X X X Extracts X X X X X X X X Extracts X X X X ..... oncept 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. - SH. R. K. PANDA, ACCOUNTANT MEMBER AND SH. ANUBHAV SHARMA, JUDICIAL MEMBER Revenue by Ms. Anupama Anand, CIT-DR Assessee by Shri Percy Pardiwalla, Sr. Adv. , Ketan Ved, Adv. Mayur Kapoor, CA, Ms. Ekta ChoprAshish a, Ca R. Safi, CA 2 ORDER PER ANUBHAV SHARMA, JM: The revenue has filed the four appeals, in hand, for the assessment years 2008-09, 2009-10, 2010-11 2011-12 while cross objections have been filed by the assessee in response to appeal of the revenue for the assessment year 2011-12. The revenue has challenged the orders of Ld. CIT(A)-42, New Delhi ( hereinafter also refered as Ld. FAA) whereby the appeals of the assessee were allowed. 1.1 The facts in brief are that, the case of the assessee was selected for scrutiny. The assessee had challenged jurisdiction of AO during the assessment year 2008-09 on the ground that jurisdiction for assessment in its case lies in Mumbai. However, the AO had passed the assessment order by holding that jurisdiction of the AO was applicable as assessee had not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of appeal :- 1. Whether the CIT(A) was justified in holding that the receipts of assessee were not in nature FTS ? 2. Whether the CIT(A) is correct in holding that the receipts of the assessee were exempt from tax on the principle of mutuality, without appreciating that the assessee was rendering specific services to its member ? 3. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal. 4. On behalf of the assessee following cross objections are raised:- The appellant objects to the order dated 16 November, 2015 passed by the Commissioner of Income-tax (Appeals) 42, New Delhi for the assessment year 2011-12 on the following among other grounds ; 1. The Commissioner of Income-tax (Appeals) erred in not deciding the following grounds in the appeal: Jurisdiction 1. The learned ADIT of Income-tax erred in passing assessment order dated 23 May 2014 without jurisdiction. The appellant therefore submits that assessment order dated 23 May, 2014 without jurisdiction ought to be quashed. Tax Treaty 6. The learned ADIT erred in not allowing benefits under the Tax Treaty between India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsement does not hold good as a gross payment is taxable as against the net profit and in that context the Hon ble Kerala High Court judgement in Cochin Refinaries Ltd. (222) ITR 534 and Hon ble AAR decision in case of Danfoss Industries P. Ltd. (268 ITR 1) and Timken India Ltd. 273 ITR 67 were relied. 5.1.3 Ld. DR also submitted that Ld. F.A.A. erred to give findings on the basis of invoices filed by assessee. It was submitted in this context that based on perusal of invoices, Ld. F.A.A. has erred to observe that the recoveries made by the appellant from it, members were in the ratio of their turnover and the invoices does not reflect the extent of services rendered by the assessee. 5.1.4 It was also submitted that Ld. F.A.A. has wrongly relied the judgement of Hon ble Supreme Court of India in Bankipur Club and Chelmspord Club. 5.1.5 Ld. DR pointed out contradictory observation being made by the Ld. F.A.A. in its order in para no. 6.3 for assessment year 2009-10, 2010-11 and 2011-12 wherein after observing in para no. 6.2 that no services whatever have been specifically provided by the assessee the action of AO of treating the subscription fee and recoveries and fee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. Kotak Securities Ltd. [2016] 67 taxmann.com 356 (SC)] viii. KPMG 8] taxmann.com 118 [2017] 81 taxmann.com 118 (Mumbai Tribunal). I x. ITAT Delhi Bench C in Assistant Director of Income Tax (E), Trust Circle II, vs. Hologram Manufacturers Association in Appeal No. 3383/Del/2009 x. ITAT Kolkata Bench A Belvedere Estates Tenants Association vs. Incometax Officer in ITA no. 1156/Kol./2011 (c) 5.2.5 Ld. Counsel for the assessee submitted that the Revenue has filed the appeals challenging the order of Ld. F.A.A. on the basis of Ld. F.A.A. holding the receipts to be of the nature of FTS and application of principle of mutuality. However, there was third reason for allowing the appeal of assessee that the subscription s fee were held to be in the nature of reimbursement and the same has not been challenged before this Tribunal so on that ground alone the revenue appeals deserve to be disallowed. 6. The Bench has given its thoughtful consideration to the submission and matter on record. 6.1 The first and foremost thing that Bench needs to address is the objection of Ld. DR that assessee had not furnished all the relevant information / documents before the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers of the Verein are governed by Articles of Verein and Supplementary Regulations as modified from time to time. The Indian firm has become member firm of the Verein by signing the agreement on 8 June 2000. A copy of aforesaid agreement is attached at page 175 of the Compilation. During the course of the assessment proceeding for the assessment years 2008-09 and 2009-10, we had submitted Articles of Verein and Supplementary Regulations as applicable for those assessment years. During the current year proceedings, we have attached Articles of Verein dated 11 June 2009 at pages 2 to 17 of the Compilation enclosed with letter dated 19 December 2012 and Supplementary Regulations dated 11 June 2009 at pages 18 to 36 of the Compilation enclosed with letter dated 19 December 2012. We are further to submit that during the course of the assessment proceedings for the assessment year 2008-09, the learned Assessing Officer did not require us to furnish any registration documents from Swiss Authorities. During the course of the assessment proceedings for the assessment year 2009-10, we have submitted the registration documents from Swiss Authorities. We are to submit that we are regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors. 3. Explain the method of accounting employed in your case. 4. Copy of agreement/Contracts with India customers/income received. 5. Details of invoices raised to the Indian customers/income received. 6. Copy of all order u/s 197 obtained from the assessing officers relevant to the assessment year in question. 7. Copy of all orders u/s 195(2) which assessee might have received from payers relevant to the assessment year in question. 8. Whether the assessee received any payment from non-resident in connection with business of non-resident in India. 9. Explain in details whether you have permanent establishment in India. 10. Whether technical services were/provided to the Indian customer during the year? If yes, Please submit the names of employees and other persons who visited India in this regard stating their period of stay, purpose and for which project there services were .provided and whether in these projects the assessee has supplied any products. The information must be provided invoice wise. 11. Furnish the details- of all expatriates whose remuneration is charged to the expenses in India who visited India during the year. 12. Furnish the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record, any evidence to be authenticated by Swiss Tax Authorities to prove that it does not pay taxes in Switzerland. At the same time, on behalf of the assessee by letter dated 14.12.2010 the Articles of Verein were submitted which had all the relevant description about nature of activities of the Verein, its composition, obligation of Verein to member firms, member firm s to Verein and obligations of member firms to each other, the process of dissolution and distribution of funds and collection of funds in the form of contribution to budgeted operating expenses. Which were considered by the Assessing Officer and even reproduced in the assessment order. 7.1. In the subsequent assessment of 2009-10, the Ld. Assessing Officer has merely reproduced the content and findings of the previous year 2008-09. 7.2. In the Assessment Year 2010-11, very specific plea was taken by the assessee vide its letter dated 08.02.2013 which is also on record in paper book for the assessment year 2010-11, at page no. 17 to 25, that in the previous assessment year 2008-09 the assessing officer had not required the assessee to furnish any registration document from Swiss Authorities while in for asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the objection of Ld. DR that assessee had not furnished all the relevant information / documents before the Ld. AO for which the matter be remitted back to the files of Ld AO. 8. Now coming to the merit of submissions about applicability of Principles of Mutuality in composition and functionality of the Verein some relevant Articles of the Vereian, relevant to understand the functioning of the Vereian need to be highlighted from the Articles of Verein originally dated 12/6/2003 as updated on 11/6/2009 and Supplementary Regulations dated 11/6/2009 (Available at pages 36 to 70 of the PB) for AY 2010-11 :- Article 1.2. Purposes. The purposes of the Verein are: (a) to further international alignment, cooperation, and cohesion among the Member Firms; (b) to assist Member Firms to conform to professional standards of then highest quality; (c) to advance the international and national leadership of the Member Firms in rendering Professional Services 16 ITA No. 5759 Ors. (d) to foster the shared beliefs, mission, and common vision of the Member Firms; (e) to perform those functions of the Verein specified in or pursuant to these Articles or the Supplemental Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofessional listings, registers and yearbooks, and telephone listings. (iii) Each Member Firm shall permit the inclusion of the International Practice Name and any other names by which it or any part of its practice is identified, and any other pertinent information, in any directories or other publications of the Verein. (iv) A Member Firm s license to use the International Practice Name shall be co-terminus with the Member Firm s continued membership in the Verein, subject to any extension under Section 11.1 (a)(i) or (ii) hereof. Upon becoming a Member Firm, a Member Firm s entire right to use the International Practice Name shall be considered to derive solely from its license under Section 2.1 (b)(ii) hereof. (c) Alternative Requirements. The Verein may approve the use of an alternative international practice name by a Member Firm, which shall include one or more of the Related Names, where local laws or other circumstances require. Any such alternative international practice name approved by the Verein shall be that Member Firm s International Practice Name for the purposes of this Supplemental Regulation. 2.2 Certain Responsibilities. ( Supplementary Regulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber Firm s assets only, and no proprietor, shareholder, partner, member, principal, or other owner of the Member Firm shall have any personal liability for any of such liabilities or obligations of the Member Firm. Except as otherwise expressly provided in or pursuant to these Articles, the Supplemental Regulation or any other agreement or document to which a Member Firm is a party, the financial obligations of the Member Firms to the Verein are limited to the annual contributions toward budgeted operating expenses as determined and approved pursuant to Article 7.1 hereof. Article 7.5 The Verein shall not provide services to clients, or direct or control the manner in which each Member Firm provides audit or other services to its clients. The Verein shall not share in the profits and losses of the Member Firms. Article 7.6 The Verein shall not have the authority to and shall not bind or make obligations on behalf of the Member Firms, and no Member Firm shall have the authority to or shall bind or make obligations on behalf of any other Member Firm or the Verein. The Member Firms shall not be and they and their shareholders, partners and employees shall not hold themselves out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in amounts payable under Section 11.3 hereof. (c) Financial Statements. The withdrawing or expelled Member Firm shall be entitled to receive the normal financial statement of the Verein for the Fiscal Year in which withdrawal or expulsion occurs, and hereby waives any right to a formal accounting of the financial affairs of the Verein. 9. Apart from giving due weightage to the judgments relied by the Ld. Senior Counsel for the assessee certain part of the judgment of Hon ble Supreme Court of India in Yum Restaurants (Market.) vs C.I.T.,New Delhi CIVIL APPEAL NO. 2847 OF 2010 decided on 24 April, 2020, 2020(4) TMI 827 (SC), where Hon ble Apex Court has almost codified the concept and principles of mutuality as applicable under Direct Tax, are reproduced below. 14. The doctrine of mutuality traces its origin from the basic principle that a man cannot engage into a business with himself. For that reason, it is deemed in law that if the identity of the seller and the buyer; or the vendor and the consumer; or the contributor and the participator is marked by oneness, then a profit motive cannot be attached to such a venture. Thus, for the lack of a profit motive, the excess o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered... 16. In order to undertake the examination of mutuality, we gainfully advert to The English and Scottish Joint Co- operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-Tax, Assam AIR 1948 PC 142, which has been quoted with approval by this Court in Commissioner of Income Tax, Bombay City v. Royal Western India Turf Club Ltd. AIR 1954 SC 85 and Bangalore Club (supra). The afore stated stream of judicial pronouncements expound three conditions/tests to prove the existence of mutuality: (i) Identity of the contributors to the fund and the recipients from the fund; (ii) Treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(24) of the 1961 Act. Completeness of Identity 18. Coterminous with the requirement of common identity, as discussed above, the law also contemplates a completeness of identity between the contributors and participators. The theory of completeness of identity presupposes the contributors and participators to be two separate classes, but there is oneness or equality in the matter of sharing of surplus/profits. This is to ensure that there is no interference of any alien commercial entity in the transaction. With the interference of any alien entity, the idea of conducting business with oneself is defeated and any profits or gains accruing therefrom become subject to tax liability. This proposition of law is succinctly predicated in British Tax Encyclopaedia [British Tax Encyclopedia (I), 1962 Edition, Pgs. 1200 and 1201] , which reads thus: For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplus are contributors, so that there is complete identity between contributors and participators. This means identity as a class, so that at any given moment of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So, based on aforesaid reproduced 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. 10.1 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities of Verein by calling the same trading activity and given finding in para 4.5 of the order of Ld. AO for AY 2008-09 that the Verein has been set up for the purpose of rendering specific services to its members. It was mentioned in para no. 6 that assessee has not provided agreement between the assessee and the Indian members, however, the Articles in pursuance of which income is earned by the assessee is dated 12.06.2003 it would be safe to assume that such fee for technical services are chargeable to tax at 20% rate. Pertinent to observe here is that actually there was no bilateral agreement between the Assessee and its Member Firms but the Member Firms were supposed to file a Declaration of Acceptance only in a way subscribing to the Articles of Verien. A copy of such declaration with letter dated 8/2/2013 with the Ld AO and copy of same is on record at page no 26 of the PB for the year 2010-11. 13. The ld. Assessing Officers 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 responsibil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 18. In the case of Dy. Commissioner of Income Tax , 3(1), Mumbai vs. KPMG (supra) relied by the assessee, the Mumbai Bench of the Tribunal has dealt with a similar matter and decided the same in favor or the said assessee which was an Indian Member Firm of KPMG International. The assesee had made payment to KPMG International. The Assessing Officer h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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