AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (4) TMI 869
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....s 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 assessee in its C.O. No. 97/Mum/2013 raised the following grounds of appeal: "1. On the facts and in the circumstances of the case and in law, the Respondent prays that the overseas remittances made to KPMG International, Switzerland, a mutual association, by the Respondent as its Member are in the nature of membership contributions constituting business income not taxable in India under Article 7 of the India-Switzerland Double Taxation Avoidance Agreement ('the DTAA') in the absence of any Permanent Establishment of KPMG International in India under Article 5 of the DT AA. 2. On the facts and in the circumstances of the case and in law and without prejudice to the above, the Respondent pr....
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....iscussing 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 (DTAA/Treaty) between India and Switzerland, the essential tax rate for royalty as provided under Article 12(2) of the Treaty will be applicable. Therefore, the assessee was held in default in respect of tax of Rs. 53,57,872/- (15% of Rs. 3,57,19,148/-), The AO also charged the interest @ 15% p.a. as per section 201(1A) vide order dated 24.03.2005. On appeal before the ld. CIT(A) order dated 24.03.2005 was upheld by ld. CIT(A) dated 27.11.2006. Further, aggrieved by the order of ld. CIT(A), the assessee filed appeal before the Tribunal vide ITA No. 1959/Mum/2007, the Tribunal vide order dated 27.10.2010 remanded the matter to the file of AO with the following direction: "9. The assessee has raised a legal argument tha....
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....e 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 International. During the year under consideration, the assessee remitted the amount of Rs. 3.57 Crore to M/s KPMG International without TDS as required u/s 195 of the Act. The assessee claimed M/s KPMG International to be a mutual association and on the principle of mutuality no tax is deductable. As per the agreement signed by assessee and M/s KPMGI certain marks as set forth in Appendix "A" to the agreement in connection with providing and advertising of service in the field of auditing and accounting, taxation, management consultancy, corporate recovery, corporate finance and other areas approved by the International Board. It was further argued that the fees charged for the use of name, mark and other facilities. The assessee acquired good....
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....angalore 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 and its head office is situated in Netherlands. M/s KPMG International is a mutual association/ organization and the assessee is a member of organization. During the year under consideration the assessee made payment of Rs. 3.57 Crore to its PE in Switzerland. While making the payment no tax was deducted at source under section 195 of the Act. The payments made were in the nature of reimbursements of cost and there was no element of income chargeable to tax therein. The principle of mutuality applies to the case of assessee, thus, the assessee was not liable to deduct tax at source at the time of payment. It was further argued that the amount remitted by assessee outside India is in the nature of reimbursement of costs to KPMG International and....
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....ty', 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 mutually agreed under Article 3(q) of the membership agreement dated 1 October 1998 that the members firm shall contribute toward the cost of KPMG International, and not for use of name, marks etc. It is not open for the revenue authorities to rewrite the nature of payment as 'royalty'. The learned counsel also drawn our attention to Article 7 of India-Switzerland DTAA (tax treaty) dealing with "business profit" and accordingly, submitted that provisions of Article 12 relating to "royalty/fees for technical services" have no application. In alternative it was argued that the payment on account of membership contribution are in the nature of business arrangements, whereby services would be rendered to its member firms in relation to professional services for....
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....h 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-Tax Act, 1961. Section 28 deals with the income chargeable under the head "profits and gains of business or profession". Under S.28, various types of incomes are chargeable to income-tax under the head "profits and gains of business or profession". Under S. 28(iii), income derived by a trade, professional or similar association from specific services performed for its members is chargeable to income-tax under the head "profits and gains of business or profession". This clause makes an exception to the general rule that income of a mutual association is not subject to charge of income-tax. In order words, the concept behind S. 28(iii) is to cut at the mutuality principle being relied upon in support of a claim for exemption, when the assessee actually d....
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....f 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 national and international clients in the area of KPMG International's core services as may be designated as core services from time to time by the International Council. The definitions of such services are set out in the respective technical manual and guidelines issued from time to time by or with the approval of International board and/or the competent international committees (steering groups) established by the International board. Where any particular type of services is designated by the International board and/or the competent international committee (steering groups) established by the International board as unsuitable for proscribed, the members form shall not provide such service to any client. It is further provided that no member firms shall provide services i....
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....ms 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 shall comprise detail of member firm and all its subsidiaries identifying the different entities. In this connection, the International board or a percent or persons designated by the International board shall have a right to inspect the accounting records and practice management information of the member firm and its subsidiaries at any time. (q) The Member Firms shall contribute to the international and regional cost of KPMG International, including the cost of professional indemnity insurance is determined from time to time by the international and respective regional boards and shall settle demands for limit of such contributions including professional indemnity insurance premiums and related cost on a timely basis. Failure to settle amount due within the established deadlines set by ....
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....arantee 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 of the member firms as further considered in the KPMG International manual. (d) In the event that member firm requires professional or technical assistance in the conduct of its practice or in servicing its clients, this may be provided through the appropriate regional headquarters or by agreements with another member firm in accordance with mutually acceptable terms and conditions. 11. The relevant clause/ Article of Tax Treaty between India and Switzerland-DTAA are as under: ARTICLE 7 BUSINESS PROFITS 1. The business profits of an enterprise of a Contracting State, other than the profits from the operation of ships in international traffic, shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the en....
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....ource 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 assessee in default under section 201(1) of the Act. The assessee further 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 amount was remitted to enable the latter in discharging its function within the terms of membership agreement signed with assessee. On further enquiries by Assessing Officer, the assessee submitted the membership agreement and others relevant information as required by him. The contention of assessee was not accepted by assessing officer. According to the assessing officer the remittance made by the assessee to KPMG International is in the nature of 'royalty' as laid down under section 9(1)(vi) of the Act and under Article 12 of Indian-Switzerland tax treaty. On appeal before Commissioner (Appeals) t....
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....tems 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 a new company was formed under tripartite agreement with the condition that all the franchisees will be members and will pay 5% of the gross sales in order to carry on co-operative advertisements to promote all the brands of which parent company was a licensee for the mutual benefit of the franchisees. It was expressly stated that surplus if any left in the accounts will not be distributed but will be carried forward for future use as per the terms of the agreement. A return was filed showing income as nil despite the fact that there was a surplus but as per the views of the company the same was not taxable on the principles of mutuality and on no-profit basis. The case was discussed at the assessment stage and the assessing officer was of the view that despite the fact that the company was being run on the basis of mutuality concept, but contributions rece....
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....ated 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 Income Tax - 2009 -TMI 77939 - (Gujarat High Courts) the High Court held that one of the essential requirements of mutuality is that the contributors to the common fund are entitled to participate in the surplus thereby creating an identity between participators and the contributors. Once such identity is established, the surplus income would not be exigible to the tax on the principle that no man can make a profit out of himself. 17. The Hon'ble Supreme Court in Bangalore Club VS CIT 350 ITR 509 (SC) considered and analyzed the legal precedents concerning the principle of mutuality on the basis of various earlier decisions and laid down three principle conditions for application of the principle of mutuality. (i) There must be complete identity between the contributors and the participants. This means identity as a class, so that at any given moment of time the p....
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....o 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 a complete identity between the contributors and the participants. Till the stage of generation of surplus funds, the set-up resembled that of mutuality; the flow of money, to and fro, was maintained within the closed circuit formed by the banks and the club, and to that extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the member banks used such deposits to advance loans to their clients. Hence, in the present case, with the funds of the mutuality, member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the 'privity of mutuality', a....