TMI Blog2017 (4) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... ue u/s 253 of the Income-tax Act ( the Act ) and Cross Objection therein are directed against the order of ld. CIT(A)-10, Mumbai dated 11.01.2012 for AY-2001-02. The Revenue has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the KPMG is a mutual association and its receipts would not constitute income chargeable to tax and is not obliged to withhold any tax without appreciating the facts. i} that the expenses incurred by the assessee company toward alleged reimbursement of cost is actually in the nature of royalty as laid down in section 9(1)(vi) of the I.T Act. ii} that such remittances constitute income of the foreign company for the purpose of section 195 of the I.T. Act and therefore, tax was liable to be deducted at source in respect of such expenditures. iii} that the payments made by the assessee to KPMG international for names, mark and other facilities were in the nature of royalty and chargeable to tax in India. 2. The appellant prays that the order of the ld. CIT(A) on the above ground be set aside and that of the assessing officer restored. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is not liable to be treated in default u/s 201(1) of the Act. The assessee further contended that principle of mutuality applied in case of assessee. The amount remitted by the assessee outside India is in the nature of reimbursement of cost to M/s KPMGI and was made to enable them in discharging its function within the terms of Membership Agreement signed between assessee and M/s KPMGI. The assessee claimed that no tax was liable for deduction at source, because expenses reimbursement cannot be treated as income assessable to tax. During the proceedings the assessee was also asked to file the copy of license agreement entered between assessee and M/s KPMGI. After hearing the representative of assessee and discussing the various contentions raised, the AO concluded that the expenses incurred by assessee on account of alleged reimbursement of cost is in the nature of royalty as laid down u/s 9(1)(vi) of the Act. Such remittance, therefore, constitute the income of foreign company for the purposes of section 195 of the Act. Therefore, assessee was liable to deduct TDs in respect of such expenses. The AO further held that as there is Double Taxation Avoidance Agreement ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is for the assessee to prove its case. Thus we reject this argument of the learned DR. 10. In view of the above discussion, we set aside both these appeals to the file of the CIT (Appeals) with a direction to adjudicate the issue raised by the assessee on the chargeability to Income Tax of payments made to M/s KPMG International. 4. In the remand proceeding, the ld. CIT(A) held that M/s KPMGI is a mutual association and its receipt would not constitute the income chargeable to tax and the assessee was not obliged to withheld any tax on such receipt. The ld. CIT(A) thereby quashed the order of AO in its order dated 11.01.2012. Aggrieved by the order of ld. CIT(A) dated 11.01.2012 the Revenue has filed the present appeal before us. On service of notice of appeal, the assessee has filed the C.O. 5. We have heard the Sh. Shri Rajguru M.V. ld. Sr. CIT-DR for the Revenue and Sh. Arvind Sonde ld. Sr. Advocate/counsel for the assessee and perused the material available on record. The ld. DR for the Revenue argued that M/s KPMG International is professional service company being one of the big four Auditors. The assessee, an Indian Firm is the Indian Member of M/s KPMG Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contributor acts a watch over the activities of the members/participator, the separate identity does not exist in fact the relation between assessee and M/s KPMG International is that of franchisee and not of a member of mutual association. The main object of M/s KPMG International are tainted with commerciality and its elementary aim is to create an International Chain of professionals who could practice across the globe by using its name and marks, in terms of making payments of percentage from the respective turnover. In support of his contention ld. DR for the Revenue relied upon the decision of Mumbai Tribunal in DCIT vs. M/s Arthur Andersen Co. (ITA No. 9125/Mum/1995), the decision of Hon ble Karnataka High Court in case of CIT vs. Bangalore Club (2006) 156 Taxmann.323. The ld. DR for the Revenue further refer and relied upon the decision of Tribunal in De Bears U.K. Ltd. vs. DCIT (2012) 18 Taxmann.com 249) (Mum) and Merit International Inc. vs. DCIT (2016) taxmann.com 347 (Mum). 6. On the other hand Sh. Arvind Sonde ld. Sr. Advocate, Counsel for the assessee argued that assessee is an Indian member of KPMG International. KPMG International is registered in Switzerland ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal are estimated at the beginning of the year and recovered from the member firms list at the end of the year, the actual cost are taken into consideration and the share of cost of each member is determined. In support of his submission the learned counsel relied upon the decision of DIT versus AP Molar [2017] taxman.com 287(SC), DCIT versus Ernst Young Private limited [2014] 49 taxman.com 386(Kolkata tribunal), DIT versus WNS Global Services(UK) [2013] 214 Taxman 317(Bombay), CIT versus Siemens Akitongesellschaft [2009] 320 ITR 320 (Bombay), WNS North America Inc ADIT [2013] 141 ITD 117(Mumbai); Jaipur Vidyut Vitran Nigam Ltd Versus DCIT [2009] 123 TTJ 888 (Jaipur). 7. For the treating the remittance of assessee to KPMG International as Royalty , the learned counsel argued that, when the parties had understood the agreement in a certain way and had acted upon the agreement, it is not open for the revenue authorities to give another interpretation and to tax the assessee on a hypothetical amount, as Royalty payable. The AO is not authorized to re-write the term of commercial agreement entered into, when agreement is held as valid and general and not collusive. It was mutual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at source. It was vehemently argued that the facts of the case in Arthur Andersen Co is not based on mutuality and the fact of his case are totally different and the ratio of the decision is not applicable on the facts of the present case. The ld. Counsel finally argued that in case the Court come to the conclusion that the assessee is having a mutual association with KPMG International and the assessee was not liable to deduct tax on source, then Cross Objection filed by assessee needs no specific adjudication. 8. We have considered the rival submissions of the parties and gone through the record of the case. Before, discussing the facts of the case we may refer certain relevant provision of Income Tax Act related with the treatment of income with regard to mutual concern, the concept and the Principle of Mutuality, the relevant clauses of agreement of assessee with KPMG International and the relevant Article of India- Switzerland DTAA. Section 2(24) defines income . As per S. 2(24)(vii), the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society; are to be treated as part of income liable to tax under the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t forth in the KPMG Statutes and the international manual to the end of maintaining the Christies and high professional standard associated with the service Marks. (b) The Member firms shall adopt is transacted plants tenancy initiative which are in line with KPMG International and regional plans: make human resources and financial investment consistent with such plans: and adopt measurements and evaluation consistent with international and regional standards all with a view to member firm operating and behaving as if they were an integral part of a uniform global professional services firm in client services, resorts, location knowledge management and business development. (c) In this connection, the Members form shall observe the common rules in the area of common values and process, services, standards, technology knowledge management, training and development, people exchange and secondment lead partner authority, images and other specific area is further described in the following subsections of this article. These common rules are binding on all Member Firms (d) ---- (e) Services: the Member Firms said provide and deliver services of the higher quality to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nowledge sharing and knowledge management processes, and shall adopt the knowledge sharing policies, practices and guidelines to share knowledge and to protect its confidential and proprietary nature as issued from time to time by or with the approval of the International board. (i) Training: development and business information: the Member Firms shall participate in internationally sponsored training and allotment initiatives and in business and professional information gathering efforts and shall share training, development and information processes and best practice. (j) People Exchange and Secondment: .. (k) Lead Partner Authority: (l) Images: (m) New products and services: .. (n) Line of business organization: .. (o) . (p) The Member Firms shall maintain and submit accurate and complete financial and other practice management information as may be requested by international and/or regional headquarters from time to time for the purpose of measurement of firm growth and performance, professional indemnity, insurance premium allocation and worldwide statistics, within the established guidelines for submissions. The Tata submitted sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such policies, standards and procedures. 6. Financial and Technical assistance (a) In the normal course of events the member firms shall be expected to provide practice funding from his own sources or through local funding arrangements. However, in the events that the member firm has recourse to KPMG International for financial support or assistance for whatever purpose the amount of such financial support assistants shall be determined by the International board and based on a proposal submitted by or on behalf of member firm and shall be governed by the provisions of international ownership policy. (b) If such financial assistance is approved it will take the form of an interest- bearing loan the rate of interest for which will be international headquarters borrowing rate plus one percent. If a guarantee or debt to any financial institution is required from KPMG International a guarantee fees equal to 1% of the amount of the debt guaranteed will be charged. (c) In certain circumstances where such financial assistance is provided KPMG International or its designate may under the term of the international ownership policy required to take a stake in the equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. 12. The assessing officer while passing the order under section 201 and 201(1A) learnt that assessee made payment of ₹ 3.57 Crore to KPMG International, Switzerland and while making the remittance no deduction of tax at source under section 195 was done. The assessing officer issued a show cause notice dated 11/06/2004 to the assessee. The assessee filed its reply dated 23/06/2004 contending therein that remittance of the said amount did not warrant any deduction of tax at source and therefore, the assessee does not deserve to be treated as an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fund which could only be expended or returned to themselves are fulfilled and thus the assessee qualifies as a mutual arrangement between KPMG International and its member firms and granted relief to the assessee. 13. We have independently examined the facts of the present case in view of the various decisions of the Hon ble Apex Court and the various High Courts. Thus, it is debatable to review the appropriateness of the application of the mutuality principle as an instrument of Government policy. The position can easily be understood in a very simple way as referred by Hon ble Delhi High Court in Yum! Restaurants (Marketing) Private Limited versus Commissioner of Income Tax (ITA No.1433/2008 dated 01-04-2009). The brief facts as summarized is that : Parent company , having license arrangement with foreign companies , used to market ready to eat food items through franchisees, formed a new subsidiary company to take care of publicity on behalf of the franchisees with the proper permission of the state authorities. The parent company was granted permission on the condition that the subsidiary would be a non-profit enterprise and that it would not repatriate its dividends. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e doctrine of mutuality lies in the principle that what is returned is what is contributed by a member. A person cannot trade with himself is the basic idea in the principle of mutuality. It is on the hypothesis that the income which falls within the purview of the doctrine of mutuality is exempt from taxation. 15. The basic principle underlying the principle of mutuality is that no one can make profit out of himself as held by Hon ble apex Court in CIT Vs. Royal Western India Turf Club Ltd., 24 ITR 551 (SC). In other words, no one can enter into a trade or business with himself. The essence of mutuality is complete identity between contributors and participators. 16. In a famous case the Commissioner of Income Tax V. Bankipur Club Ltd [1997] 226ITR 97 (Supreme Court) the Supreme Court considered as to whether a surplus of receipts over expenditure generated from the facilities extended by a club to its members were exempt on the ground of mutuality. The Supreme Court reiterated the principle that in the case of a mutual society, there must be a complete identity between the class of contributors and of participators. In Sports Club of Gujarat Limited V. Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zation, etc. However, the mandate must not be construed myopically. While in some situations, the benefits may be evident directly in the short-run, in others, they may be accruable to an organization indirectly, in the long run. Space must be made for both such forms of interaction between the organization and its members. (iii) The third condition is that there must be no scope of profiteering by the contributors from the fund made by them, which could only be expended or returned to themselves. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for themselves, would makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded. It is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. However, at what point mutuality ends and commerciality begins is a difficult question of fact. Applying the above legal position to the facts of the present case, the court found as follows: (a) Identity: The arrangement lacked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on non members i.e. the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, snaps the link of mutuality and thus, breaches the third condition. There is nothing on record which shows that the banks made separate and special provisions for the funds that came from the club, or that they did not loan them out. Therefore, clearly, the club did not give, or get, the treatment a club gets from its members; the interaction between them clearly reflected one between a bank and its client. The Hon ble Apex Court held that the principle of mutuality did not apply to the interest earned by the assessee from the fixed deposits placed with its corporate members. 18. In CIT Vs Standing Conference of Public Enterprises (SCOPE) [2009] 319 ITR 179 (Delhi High Court) the parties agreed before the High Court that the issue as to whether receipts on account of interest earned from surplus funds deposited with the banks would be taxable would follow b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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