2017-TII-INSTANT-ALL-450
20 April 2017   

CASE LAW

2017-TII-72-ITAT-MUM-INTL

DCIT Vs KPMG: MUMBAI ITAT (Dated: April 07, 2017)

Income tax - Sections 9(1)(vi), 195, 201(1) & 201(1A)

Keywords - principle of mutuality - payment to non-resident - reimbursement of cost - TDS obligation

The assessee is an Indian member firm of M/s KPMG International (KPMGI), Switzerland. The AO learnt that assessee during the year had made payment of Rs. 3.57 Crore to M/s KPMG International without deducting tax at source u/s 195. Accordingly he issued a notice to assessee requiring the assessee to show-cause as to why the said amount paid to non-resident entity without TDS and why proceedings u/s 201(1) and 201(1A) should not be initiated against it. In response, the assessee pleaded principle of mutuality and contended that foreign remittances by the assessee was 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 AO however concluded that the expenses incurred by assessee on account of alleged reimbursement of cost was in the nature of 'royalty' as laid down u/s 9(1)(vi). Such remittance, therefore, constitute the income of foreign company for the purposes of section 195. The AO further held that as there was DTAA between India and Switzerland, the essential tax rate for royalty as provided under Article 12(2) of the Treaty would be applicable. Therefore, the assessee was held in default in respect of tax of Rs. 53,57,872/-, and was also charged interest @ 15% p.a. as per section 201(1A). In the remand proceeding, the CIT(A) held that M/s KPMGI was 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.

On appeal, the ITAT held that,

Whether contribution made by a member to the mutual association in the form of foreign remittances, would constitute income chargeable to tax - NO: ITAT

Whether interest liability u/s 201(1A) can be attached to such member, upon its failure to withhold tax before remitting such foreign payment as part of the mutual arrangement - NO: ITAT

+ the 'Principle of Mutuality' is based on the concept that income earned by a person from external sources is taxable. Thus, income derived from oneself cannot be treated as income thus cannot be taxed. Mutuality organizations have been in existence since period unknown and have played vital role in the development of the society. Presently, we can see such organizations existing in the shape of insurance companies, societies, clubs, associations etc. Initially mutual organizations were created with the sole purpose of compensating members by providing insurance without any motive to earn profits or gains. Thus, the essential elements of a mutual organization are; (i) it is an association of people called members; (ii) there is a common cause (iii); every member makes his contribution and (iv) the aim of the activity is not to earn profits or gains. The AO while passing the order u/s 201 & 201(1A) learnt that assessee had made payment of Rs. 3.57 Crore to KPMG International, Switzerland and while making the remittance, no deduction of tax at source u/s 195 was done. The assessee contended in the reply that the principle of Mutuality applies in its case and the amount remitted by it outside India was in the nature of reimbursement of costs to KPMG International. The assessee explained that it is a partnership firm set up in India in 1993. The assessee entered into partnership agreement and also license agreement in October 1998 with KMPGI which is a non-commercial Association established under the law of Swiss confederation, having its headquarter in Netherland. The object of KPMG International is development, coordination, support promotion and facilitation of the operation of KPMG member firms vis-a-vis with their clients. After considering the contention of assessee and referring to various decisions, the CIT(A) concluded that all contributions came from member firms who directly benefits from the activities of the KPMG International. The identity of the contributors to the fund and recipient of services from the fund is clearly the same, viz member firms. The CIT(A) also concluded that all three condition as set out by Apex Court in Chelmsford Club case with regard to identity of contributors, the treatment of contribution in accordance with their mandate and the impossibility that contributors should derive profit from contributions made by themselves to the 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;

+ 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 Delhi High Court in Yum! Restaurants (Marketing) Private Limited versus Commissioner of Income Tax - 2009-TIOL-168-HC-DEL-IT). The High Court therein held that the concept of Mutuality postulates that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus are contributors to the common fund. It was in this sense that the law postulates that there must be a complete identity between the contributors and the participators. The essence of the 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. The basic principle underlying the principle of mutuality is that no one can make profit out of himself as held by Apex Court in CIT Vs. Royal Western India Turf Club Ltd. - 2002-TIOL-385-SC-IT-CB. In view of these discussion, we may conclude that in the case in hand, there is a complete identity between the contributors and participators; the actions of the participators and contributors are in furtherance of the mandate of the association. There seems be no element of profit by the contributors from a fund made by them, which could only be expended or returned to themselves. Based on these conditions and respectfully relying on the case laws as the Apex Court and various High Courts laid down that the case of the assessee falls within the four corner of the ambit of the 'Principle of Mutuality'. Thus, we do not find any reason or ground to interfere in the order passed by CIT(A).

Revenue's appeal dismissed

 

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