2018 (6) TMI 208 - AAR - Income Tax

Tax Exemption for International Non-Profit Liaison Office in India

The Authority for Advance Rulings determined that the Liaison Office (LO) proposed by an International Non-Profit Association in India would not be ... Representative/liaison office (LO) - Doctrine of Mutuality - India-Belgium DTAA - whether the liason office proposed to be established by in India would be liable to income-tax or India – whether membership fee and contribution from the Indian members would be liable to Income-tax – Applicant is rendering specific services for its members, income derived by it falls under section 28(iii) as ‘Profits and Gains of Business and Profession’? - PE in India - Held that:- Simply because some incidental activity of the assessee-society is revenue generating, the same does not provide any justification to hold that it is tainted with ‘commerciality’ and reaches a point where relationship of mutuality ends and that of trading begins. Where the principle of mutuality operates,and the profits cannot be distributed, but can only be utilized for the benefit of members and confined to the objects of the organization, receipts or income cannot be brought to tax. - the Applicant’s activities are on the principle of mutuality, and it is not created for doing business or earning profits. A PE to come into existence, within the meaning of Article 5 of the said DTAA, in the first place there should be a fixed place of business through which the business of an enterprise is wholly or partly carried on. Once we hold that the Applicant works on the principle of mutuality and is not an enterprise set up for the purpose of doing business or earning profit, the question of any PE coming into existence does not arise. The Liaison Office (LO) proposed to be established would not be liable to tax in India under the provisions of the Income-tax Act, 1961 or the India-Belgium DTAA. Membership fee and contribution from members received by IZA Belgium from the Indian members would not be liable to Income-tax in India under the provisions of the Income-tax Act, 1961 or the India-Belgium DTAA. Issues Involved:1. Tax liability of the Liaison Office (LO) proposed to be established by the Applicant in India.2. Tax liability of membership fees and contributions received by the Applicant from Indian members.Issue-wise Detailed Analysis:1. Tax Liability of the Liaison Office (LO) Proposed to be Established by the Applicant in India:The Applicant, an International Non-Profit Association based in Belgium, sought a ruling on whether its proposed LO in India would be liable to income tax under the Income-tax Act, 1961 or the India-Belgium DTAA. The LO's activities include promoting zinc usage in fertilizers and galvanizing steel, organizing seminars, and spreading awareness about zinc deficiency in agricultural soils. The Revenue argued that the Applicant provides specific services to its members, which should be taxed under section 28(iii) of the Act as 'Profits and Gains of Business and Profession.' However, the Applicant contended that these services are general and available to all members, not specific to any individual member, and are conducted on a not-for-profit basis.The ruling concluded that the Applicant operates on the principle of mutuality, meaning it does not earn profit from its members. The services provided are not specific but general and available to all members, aligning with the Applicant's objectives. The surplus generated is reinvested into the organization and not distributed among members, fulfilling the not-for-profit criteria. Therefore, the LO would not be liable to tax under the Income-tax Act, 1961 or the India-Belgium DTAA.2. Tax Liability of Membership Fees and Contributions Received by the Applicant from Indian Members:The Applicant also sought clarity on whether membership fees and contributions received from Indian members would be subject to income tax in India. The Revenue's stance was that the Applicant's activities, including organizing conferences and providing technical expertise, constitute business activities, thereby attracting tax liability. However, the Applicant argued that these activities are part of its core objectives and not aimed at profit-making. The principle of mutuality applies, meaning the receipts from members are not income but contributions towards the common objective.The ruling determined that the Applicant's activities are conducted on a mutual basis, with no profit motive. The membership fees and contributions are used to further the organization's objectives and are not distributed as profits. The principle of mutuality is upheld, and the membership fees and contributions from Indian members are not liable to income tax under the Income-tax Act, 1961 or the India-Belgium DTAA.Conclusion:The Authority for Advance Rulings concluded that the Liaison Office (LO) proposed to be established by the Applicant in India would not be liable to income tax under the provisions of the Income-tax Act, 1961 or the India-Belgium DTAA. Additionally, the membership fees and contributions received by the Applicant from Indian members would not be subject to income tax in India under the same provisions. The ruling emphasized the principle of mutuality and the not-for-profit nature of the Applicant's activities, which do not constitute business or profit-making endeavors.