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2015 (5) TMI 42 - ITAT MUMBAI

2015 (5) TMI 42 - ITAT MUMBAI - TMI - Denial of exemption being an income of mutual concern - Principle of mutuality - Income from the transaction of non members is outside the purview of the mutuality - Treatment of reimbursement cost as income - Estimation of profits at 5% of gross amount recovered from non-members - Applicability of provisions of section 44C - Interest u/s 234B of the Act - Held that:- The ld. A.R. has placed on record order of the ITAT in assessee’s own case [2015 (5) TMI 11 .....

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w of the mutuality.

Treatment of reimbursement cost as income - The ld. A.R. placed on record order of the Tribunal in [2015 (5) TMI 113 - ITAT MUMBAI] for A.Y. 2006-07 dated 14-11-2012 wherein exactly similar issue has been decided against the assessee holding that reimbursement cost is income. The ld. A.R. also placed on record order of the Tribunal in [2014 (1) TMI 1227 - ITAT MUMBAI] for A.Y. 2007-08 dated 22-1-2014 wherein this issue has been decided against of the assessee at p .....

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e by the order of the Tribunal in [2015 (5) TMI 114 - ITAT MUMBAI] for A.Y. 2008-09 dated 31-01-2013. As the facts and circumstances during the year was same, respectfully following the order of Tribunal in assessee’s own case, we uphold the action of lower authorities estimating the profit of assessee company at 5% of gross amount recovered from non-members.

Applicability of provisions of section 44C - We find that this issue is also covered against the assessee by the order of the T .....

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rinciple contended in Article 7(1)(a) of the India Belgium Tax Treaty - We find that this issue is also covered by the order of the Tribunal in assessee’s own case in [2015 (5) TMI 114 - ITAT MUMBAI] for A.Y. 2008-09 order dated 31-01-2013 vide para 10 on page 11 which reads as under:- “10. It has been admitted by the learned counsel for the assessee that grounds No. 3 to 8 will render academic in view of the findings given in grounds No. 1 and 2. Consequently, these grounds are also treated as .....

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- The DDIT held that the entire income of the assessee company is subject to tax and accordingly levied interest u/s 234B of the assessee. We find that this issue is covered in favour of the assessee by the order [2012 (11) TMI 948 - ITAT MUMBAI] dated 26- 9-2012 of the Tribunal for A.Y. 1996-97. Respectfully following the above order of Tribunal in assessee’s own case [2012 (11) TMI 948 - ITAT MUMBAI], we allow this ground in favour of the assessee. - Decided against the revenue. - I .T.A. No.5 .....

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rounds have been taken by the Revenue in this appeal:- 1) Whether On the facts and in the circumstances of the case and in law, the LD. CIT (A) is correct in holding that the assessee is covered by the principal of mutuality despite the fact that: (i) The assessee has made transactions with the non members also, and (ii) Assessee has failed to produce any documentary evidences regarding the expenses and thereby, failed to satisfy the Assessing Officer that the revenue received were matched by th .....

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ide a telecommunication network to al l the airl ines. The assessee had claimed that it is a mutual benef it society and its income is exempt. Survey u/s 133A was carried out in the premises of the assessee on 29-11-2002. The A.O. has held that the assessee is not a mutual benef it society and its income is not entitled for exemption being an income of mutual concern.By the impugned order, the ld. CIT(A) held that the assessee is covered by principle of mutuality. Aggrieved by this the Revenue i .....

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he assessee as covered by the principle of mutuality has been decided as under:- We have heard the Id DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. At the outset. we note that the issue involved in the revenue's appeal as well as in the Cross Objection of the assessee are considered and decided by the Tribunal in assessee's own case for the Assessment Year 1996-97 vide order dated 26.9.2012. 4 The only issue raised by the revenue is rega .....

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s with the members do not convert its non-mutual status to mutual. In the like manner, the otherwise status of mutuality of an organization cannot be destroyed because of a few transaction with the nonmembers. What extent of participation by non-members destroys the otherwise mutual status of an organization or what 'extent of participation by members changes the otherwise status of non-mutuality depends on the consideration of the totality of facts and circumstances of each case. 3. 12. Fal .....

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bers, there can be no tax on such profit on the basis of the principle of mutuality. The reason is that the contributors to the profit and participators in such profit are the same persons as a class. If no profit follows from the transactions with the members, obviously, there can be no tax even de hors the rule of mutuality. c. If. an organization of the nature as discussed in point no. b above, apart from entering into transactions with its members in furtherance of its objects, invests its f .....

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nd form an association and such association sells/provides goods/services/facilities ONLY TO public at large, that is, NON-MEMBERS, there may or may not be profit motive. When there is profit motive and profits actually follows, such profit is liable to tax. If there is no profit motive but still profit follows, such a profit is also chargeable to tax. If, however there is no profit motive and no profit results, there will not be any tax because of no income and not because of principle of mutua .....

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s such. Whereas profits from transactions with non-members will be liable to tax, profit from transactions with the members will continue to enjoy exemption. When the organization provides facilities and services both to its members and non-members, the following consequences flow:- (i) If the 'object' of such an organization is 'to earn profit', there in no mutuality in respect of transactions with members. (ii) When the 'object' of the organization is 'not to earn p .....

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d that the assessee extended facilities to Airport Authorities. United Nation. IFC. UNESCO and Equant customers. It is evident from page 27 para 74 of the 'Statement of facts' filed by the assessee before the learned CIT(A) that the assessee company and Equant shared network outside India in order to achieve economies of scale. Under this arrangement, the costs incurred by each party were shared according to usage and these costs recharged were shown in its Income and Expenditure account .....

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es extended by the assessee. 3.14. Now let us see the volume of transactions with such nonmembers. The assessee's contention is that it was simply recovering costs from its members and non-members for rendering services and there was no profit motive. The total of cost recoveries from government, international organizations and Equant customers, constituting non-members as a group, is 0.07% of the total cost recoveries. It shows that the assessee provided services to its members at 99.93% of .....

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to foster all communication and information processing, matters directly or indirectly connected with the transmission and processing of all categories of information required in the operation of the air transport industry and to study the problems relating to them with the aim of promoting in all countries safe and regular air transport'. Other Objects of the assessee are on the same lines. There is no reference to any "profit motive" in such objects. It has been consistently clai .....

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ed opinion that the principle of mutuality cannot be denied in entirety even in respect of transactions by the assessee with its members. Accordingly, the view taken by the learned CIT(A) cannot be faulted with insofar as it accepts the rule of mutuality qua the transactions with members and denies the same qua the transactions with non-members. 3.18. The next argument of the learned Departmental Representative in support of his contention that the mutuality should be rejected in entirety was wi .....

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ble Madras High Court considered the facts in which the object of the society was to create and cultivate the habit of saving and thrift among the members of the society to help by way of loan or other assistance to members in case of a bona fide need. The rules and regulations of the society made it compulsory for every member to participate in the scheme of deposit. The Assessing Officer denied the mutuality on the ground that every depositor was not necessarily borrower and therefore, the int .....

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the mutuality is lost by reason of a member resigning or retiring from the society and not getting any shore in the reserves. In other words, the larger question is whether the contributors to the fund and participators in the fund should be the same persons on an individual level or a class level. The Hon 'ble jurisdictional High Court in the case of Sind Co-operative Housing Society (supra) considered the question of mutuality on the transfer fees received by the co-operative society from .....

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se of Kumbakonam Mutual Benefit Fund Ltd. (supra) to contend that the principle of mutuality fails if the persons who contribute to the income are not the same persons who participate in the surplus of the organization. In this case the assessee carried on a banking business restricted to its shareholders, that is, the shareholders were entitled to participate in various recurring deposits schemes of the assessee or to obtain loans of securities. These recurring deposits constituted the main sou .....

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g deposits and made advances to certain members. The surplus was distributed amongst members according to their shareholding after making a provision for reserves etc. The shareholders who were entitled to participate in the surplus need not have either token loans or made recurring deposits. From these facts, it is palpable that the shareholders were different as a class from the persons who availed the loan facility as a class. It was not necessary for a shareholder either to take loan or to m .....

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same as a group or class of persons. The mere fact that a person at the time of resigna1T6n or retirement is not entitled to share in the reserves of the organization, would not damage the mutuality so long as the persons who are entitled to share such reserves continue to be the members as a class. 3.23. Be that as it may, it is observed that this fact has been considered by the Tribunal while deciding the principle of mutuality in relation to assessment years 1974-75 and 1975-76. The Tribunal .....

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tion of refurbishment cost. The question of reserves has also been discussed in the order for assessment years 1974-75 and 1975-76. In view of the conclusion arrived at by the Tribunal in earlier years holding that the mutuality is not disturbed by reason of Article 20 and 50 of the assessee or the creation of reserves, we do not deem it necessary to dive deep into the arguments of the Id. DR with a view to bring out any decision contrary to what has already been taken by the Tribunal in earlier .....

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he members only and the income from the transaction of non members is outside the purview of the mutuality. 6. The ld. A.R. also placed on record order of the Tribunal in ITA No. 3807/Mum/10 for A.Y. 2007-08 dated 22-1-2014 as well as ITA No. 6651/Mum/11 for A.Y. 2008-09 order dated 31-01-2013 wherein similar issue has been decided in favour of the assessee. 7. As the facts and circumstances during the year under consideration are exactly same, we do not find any infirmity in the order of the ld .....

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as the ld. DR and considered the relevant material on record. It is fairly admitted by both the parties that the issue raised in the Cross Objection has also been considered and decided by this Tribunal in assessee's own case for the Assessment Year 1996-97. However, the Id Sr counsel for the assessee has submitted that the Tribunal has made certain observations/remarks in para 5.5 of the order for the Assessment Year 1996-97 at page 77 of the order regarding the correctness of the income di .....

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1996-97. He has referred the notes of accounts in the audit report and submitted that the accounts of the Head Office are audited by some other auditors and the audit report of the other auditor has been relied upon by the auditor of the assessee. 6.1 On the other hand, the Id DR has submitted that the issue as well as the facts are identical in the Assessment Year under consideration to those of Assessment Year 1996-97 and therefore, the Tribunal. after taking note of the fact that it was found .....

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alt by the Tribunal for the Assessment Year 1996-97 in paras 5.4 & 5.5 as under: 5.4. We have heard the rival submissions and perused the relevant material on record. There can be no dispute about the fact that any amount received by way of reimbursement, not containing any element of profit, is not liable to tax. This principle has been laid down by the Hon'ble jurisdictional High Court in CIT v. Siemens Aktiongesellschaft (2009) 177 Taxman 81 (Bom.)] and the Special Bench of the Tribun .....

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me liable to tax from such reimbursement. We agree with the learned AR on this principle that the reimbursement of expenses does not lead to any income and in such a situation there can be no question of any income embedded in such reimbursement. 5. However we find that this principle is not applicable in the facts and circumstances of the instant case. It is observed from the statements of Shri S. Gopalakrishnan and Mr. Andrew C1eak recorded at the time of survey that the basis of allocation of .....

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nues, it was admitted that the entry was passed on the receipt of intimation from HO and how such revenues are determined, was not known. In response to question nos. 12 and 13, Shri Gopalakrishnan admitted that accounts were finalized by the HO and after finalization of such accounts, a signed copy of the balance sheet was sent to the branch office in Indio. The learned AR has invited our attention towards its letter doted 5.02.2005 addressed to the Id. CIT(A) about the basis of allocation. Fro .....

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lso observed that the basis of allocation of costs amongst various branches is known only at the HO level with no intimation to the Indian branch about such basis. At this stage, we would like to highlight that India is concerned only with the tax revenues relating to Indian operations. Unless it is properly established that 01/ the expenses claimed by the Indian branch represents the assessee s shore in a proper manner, it cannot be accepted that the allocation was made on some rational basis. .....

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T{A}. On a specific question as to what is the amount of under-recovery or overrecovery in the accounts of the assessee for this year or any earlier or later year, the learned AR failed to point out any such amount. We have perused the Income and expenditure account and balance sheet of the assessee. It is observed that both the sides of the assessee's Income and expenditure are matching paisa to paisa and there is no under-recovery or over-recovery shown as an asset or a liability in its ba .....

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re was no profit element in it, is not open for verification. 7.2 When the Tribunal has decided this issue after considering the rival contention and relevant facts, then in the absence of any new facts or material, we do not find any substance in the contention of the ld Sr counsel for the assessee regarding the marks of the Tribunal in the earlier year. Moreover, the same does not effect the findings of the Tribunal on this issue. 10. The ld. A.R. also placed on record order of the Tribunal in .....

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members is covered against the assessee by the order of the Tribunal in ITA No. 6651/Mum/11 for A.Y. 2008-09 dated 31-01-2013. Precise observation of the Tribunal at para 8 to 9 at page No. 8 to 11 of the order is as under:- 8. The learned Counsel for the assessee submitted before us that the issue raised in the cross objection has been decided against the assessee in assessee's own case for assessment year 1996-97 and in the assessment year 2006-07, decided by the Tribunal, vide order dated .....

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ns and perused the relevant material on record. There can be no dispute about the fact that any amount received by way of reimbursement, not containing any element of profit, is not liable to tax. This Principles has been laid down by the Hon ble jurisdictional High Court in CIT v. Siemens Aktiongesellschaft [(2009) 177 Taxman 81 (8om.)J and the Special Bench of the Tribunal in the case of Mahindra and Mahindra Ltd. v. DCfT [(2009) 313 ITR (AT) 263 (Mum) (SB). In these cases, it has been held th .....

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es does not lead to any income and in such a situation there can be no question of any income embedded in such reimbursement. 5.5. However we find that this Principles is not applicable in the facts and circumstances of the instant case. It is observed from the statements of Shri S. Gopalakrishnan and Mr. Andrew Cleak recorded at the time of survey that the basis of allocation of costs to different countries by the HO was not known. It was admitted that the HO allocates a proportion of its gener .....

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ned, was not known. In response to question nos. 12 and 13, Shri Gopalakrishnan admitted that accounts were finalized by the HO and after finalization of such accounts, a signed copy of the balance sheet was sent to the branch office in India. The learned AR has invited our attention towards its letter dated 5.02.2005 addressed to the Id. CIT(A) about the basis of allocation. From this letter it is crystal clear that the assessee stated before the learned CIT( A) that "the global cost recov .....

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imation to the Indian branch about such basis. At this stage, we would like to highlight that India is concerned only with the tax revenues relating to Indian operations. Unless it is properly established that all the expenses claimed by the Indian branch represents the assessee's share in a proper manner, it cannot be accepted Societe International De Telecommunications Aeronautiques that the allocation was made on some rational basis. Here is a case in which both the sides of the assessee& .....

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f underrecovery or over-recovery in the accounts of the assessee for this year or any earlier or later year, the learned AR failed to point out any such amount. We have perused the Income and expenditure account and balance sheet of the assessee. It is observed that both the sides of the assessee s Income and expenditure are matching paisa to paisa and there is no underrecovery or over-recovery shown as an asset or a liability in its balance sheet. Further, when we consider the fact that the acc .....

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When the Tribunal has decided this issue after considering rival contention and relevant facts, then in the absence of any new facts or material, we do not find any substance in the contention of the ld Sr counsel for the assessee regarding the remarks of the Tribunal in the earlier year. Moreover, the same does not effect the findings of the Tribunal on this issue. 7.3 As regards ground no.2 to 9 of the CO are concerned, the Tribunal has considered the same in para 5.6 & 5.7 as under: &quo .....

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ection 44C only talks of HO expenses, which mean executive and general administrative expenditure incurred by the assessee outside India including expenditure in respect of rent, rates, repairs etc. It is only the allocation of general and administrative expenses which is covered within the purview of ITA No. 572/Mum/2010 & CO No.159/Mum/2010 Societe International De Telecommuni-cations Aeronautiques section 44C. On the contrary, we are considering a case in which not only the basis of alloc .....

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sessing Officer and also applied by e learned CIT( A) in estimating the income of the assessee. In our considered opinion the learned CIT(A) was more than justified in estimating the income at 5% of the gross receipts from nonmembers. These grounds taken by the assessee are not allowed. " 8. Following the earlier order of the Tribunal, we find no merit in the ground no 1 to 9 of the CO raised by the assessee; accordingly, the same are dismissed. " 9. Thus, respectfully following the ea .....

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section 44C of the Act to the assessee company in respect of certain expenses incurred at head office level which may not fall within the definition of head office expenditure as defined in section 44C of the Act. 14. We find that this issue is also covered against the assessee by the order of the Tribunal in ITA No. 572/Mum/10 for A.Y. 2006-07 dated 14-11-2012. Precise observation of the Tribunal at para 7.3 to 8 at page No. 10 to 11 of the order is as under:- 7.3 As regards ground No. 2 to 9 o .....

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of the gross receipts. 5.7. We are not convinced with this contention for the reason that section 44C only talks of HO expenses, which mean executive and general administrative expenditure incurred by the assessee outside India including expenditure in respect of rent, rates, repairs etc. It is only the allocation of general and administrative expenses which is covered within the purview of section 44C. On the contrary, we are considering a case in which not only the basis of allocation of expe .....

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o applied by the learned CIT(A) in estimating the income of the assessee. In our considered opinion the learned CIT(A) was more than justified in estimating the income at 5% of the gross receipts from non-members. These grounds taken by the assessee are not aIlowed." 8. Following the ear1ier order of the Tribunal, we find no merit in the ground no 1 to 9 of the CO raised by the assessee, accordingly, the same are dismissed . 15. Exactly similar issue has been decided by the Tribunal in A.Y. .....

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so allocates the matching cost recoveries so that in the event of any disallowance of head office cost apportionments then the matching cost recoveries should also be excluded from the taxable income of the branch applying the principle contended in Article 7(1)(a) of the India Belgium Tax Treaty. 16. We find that this issue is also covered by the order of the Tribunal in assessee s own case in ITA No. 6651/Mum/2011 for A.Y. 2008-09 order dated 31-01-2013 vide para 10 on page 11 which reads as u .....

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re, the same are dismissed in limine as not pressed. 19. In ground No. 9 the assessee is aggrieved for not taking interest income as covered by the principle of mutuality. 20. The ld. A.R. fairly conceded that this ground also covered against the assessee by the order of the Tribunal in assessee s own case for assessment years 2007-08 and 2008-09. Respectfully following the order dated 22-1- 2014 and 31-1-2013 for assessment years 2007-08 and 2008-09 of the Tribunal in assessee s own case, we di .....

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