TaxTMI 
TaxTMI 
2020 (4) TMI 827
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....f income over expenditure for the Assessment Year 2001-02, was settled in favour of the Revenue and against the assessee, thereby confirming the orders of the Income Tax Appellate Tribunal (for short, "the Tribunal"), Commissioner of Income Tax (Appeals) [for short, the "CIT(A)"] and the Assessing Officer. The preceding forums, without any exception, have returned consistent verdicts refusing to acknowledge the assessee company as a mutual concern and denying any exemption from taxability. 3. The appellant company Yum! Restaurants (Marketing) Private Limited (for short, "YRMPL" or "assessee company" or "assessee") was incorporated by YRIPL as its fully owned subsidiary after having obtained approval from the Secretariat for Industrial Assistance (for short "SIA") for the purpose of economisation of the cost of advertising and promotion of the franchisees as per their needs. The approval was granted subject to certain conditions as regards the functioning of assessee, whereby it was obligated to operate on a non-profit basis on the principles of mutuality. The relevant clauses of the approval granted by the SIA for the aforementioned operations read thus: "3. It is noted that the....
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....ay of the following month. Details of the bank account, of each Brand Fund set up by TRIM will notified to Franchisee by TRIM from time to time. Notwithstanding the aforesaid, the executive committee of any Brand (constituted under Article 7 of this Agreement) may, by a three fourth majority, which shall be binding on all franchisees of Tricon including the Franchisee, require the franchisee to pay the advertising Contribution in advance. For the avoidance of doubt it is clarified and agreed that while recommending advance payment of Advertising Contribution the chairman will not have a casting vote. Franchise will spend an additional 1% of Revenues, in the manner directed by Tricon and/or TRIM in writing from time to time, on such local store marketing, advertising, promotional and research expenditure proposed by Franchisee and approved in advance by Tricon and/or TRIM during the relevant Accounting Period, in accordance with the requirements and guidelines set out in the Manuals, provided that if Franchisee fails to spend the full amount as directed by Tricon and/or TRIM franchisee will pay the unspent amount to TRIM within the period specified in a written demand from TRIM. ....
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.... any amount as it may deem appropriate and that YRIPL shall have no obligation to pay any such amounts if it chooses not to do so. This clearly shows that YRIPL was under no legal obligation to pay any amount of contribution as per its own version reflected from tripartite agreement." 6. The imposition of liability by the Assessing Officer was upheld by the C.I.T. (A) on the ground of taint of commerciality in the activities undertaken by the assessee company, wherein it was observed thus: "1.14 ....The AMP activity is quite a critical component of running a successful business venture, it is intrinsically linked to sales and profit of the franchisees the contributors. Accordingly it cannot be said that such activity is immune from the taint of commerciality. Unlike in the cases of a club, the appellant Co. is not existing for any social inter course nor is it for cultural activities where the idea of profit or trade does not exist. What is essential is that there should not be any dealing with outside body which results in a benefit which promotes some commercial/business venture. There should not be any profit earning motive in any transaction directly or indirectly. In fact ....
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....he assessee which arose due to contribution from certain persons who were neither the benficiaries nor have right to receive the surplus...." (emphasis supplied) 8. The consistent line of opinion recorded by the aforementioned three forums was further approved in appeal by the High Court vide impugned judgment, by observing thus: "8. ....The principle of mutuality as enunciated by the Courts in various cases is applicable to a situation where the income of the mutual concern is the contributions received from its contributors. The expenses incurred by the mutual concerns are incurred from such contributions and hence on the principle that no man can do business with himself, the excess of income over expenditure is not amenable to tax. However, in the present case the authorities below have returned a finding of fact that the fund as contributors such as Pepsi Food Ltd which do not benefit from the APM Activities. Moreover, the principle of mutuality is applicable to those entities whose activities are not tinged with commercial purpose. As a matter of fact in the instant case the parent company i.e., YRIPL which has also contributed to the brand fund is under the agreement ....
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....ns to draw a parallel between the functioning of the assessee company and clubs to support the presence of mutuality. 12. The Revenue/respondent has countered the submissions made by the assessee company by submitting that the moment a nonmember joins the common pool of funds created for the benefit of the contributors, the taint of commerciality begins and mutuality ceases to exist in the eyes of law. It has been submitted that the assessee company operated in contravention of the SIA approval as contributions were received from Pepsi, despite it not being a member of the brand fund. To buttress this submission, it is urged that once the basic purpose of benefiting the actual contributors is lost, mutuality stands wiped out. 13. We have heard Mr. Balbir Singh, learned senior counsel for the appellant and Mr. V. Shekhar, learned senior counsel for the respondent. Re: Question (i): 14. The doctrine of mutuality traces its origin from the basic principle that a man cannot engage into a business with himself. For that reason, it is deemed in law that if the identity of the seller and the buyer; or the vendor and the consumer; or the contributor and the participator is marked by o....
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....he trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered..." 16. In order to undertake the examination of mutuality, we gainfully advert to The English and Scottish Joint Cooperative Wholesale Society Ltd. v. Commissioner of Agricultural Income Tax, Assam AIR 1948 PC 142, which has been quoted with approval by this Court in Commissioner of Income Tax, Bombay City v. Royal Western India Turf Club Ltd. AIR 1954 SC 85 and Bangalore Club (supra). The aforestated stream of judicial pronouncements expound three conditions/tests to prove the existence of mutuality: (i) Identity of the contributors to the fund and the recipients from the fund; (ii) Treatment of the company, though incorporated ....
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.... parties outside the closed circuit of members. It would be amenable to income tax as per Section 2(24) of the 1961 Act. Completeness of Identity 18. Coterminous with the requirement of common identity, as discussed above, the law also contemplates a completeness of identity between the contributors and participators. The theory of completeness of identity presupposes the contributors and participators to be two separate classes, but there is oneness or equality in the matter of sharing of surplus/profits. This is to ensure that there is no interference of any alien commercial entity in the transaction. With the interference of any alien entity, the idea of conducting business with oneself is defeated and any profits or gains accruing therefrom become subject to tax liability. This proposition of law is succinctly predicated in British Tax Encyclopaedia - British Tax Encyclopedia (I), 1962 Edition, Pgs. 1200 and 1201, which reads thus: "...For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplus are contributors, so that there is complete identity between con....
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....o pay to Tricon pursuant to [sic] the Franchisee Agreements." Furthermore, "Franchise Agreements", as defined in the definition clause, means agreements executed between Tricon and Franchisee. As a corollary, what follows is that for any amount received by the assessee company to be treated as an advertising contribution, it must be paid by a franchisee, that too in the aftermath of a prior franchisee agreement to that effect. In the light of the prevailing relationship, there is no such franchisee agreement between Tricon or TRIM and Pepsi Foods Ltd. and therefore, the amounts received from Pepsi Foods Ltd. cannot be viewed as advertising contributions "from a member of the mutual undertaking" as such. 21. In the present case, therefore, the assessee company is realising money both from the members as well as non-members in the course of the same activity carried on by it. This court, in Royal Western India Turf Club Ltd. (supra) has categorically held such operations to be antithetical to mutuality. We deem it apposite to take note of the dictum in Bankipur Club (supra), wherein this principle has been restated thus: "22. ...if the object of the assessee company claiming to ....
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....ssessee company with commerciality and concomitantly contravened the prerequisites of mutuality and non-profiteering. 24. The mutuality and non-profiteering character of a concern are to be determined in light of its actual working structure and the factum of corporation or incorporation or the form in which it is clothed is immaterial. It is, therefore, imperative to examine the actual functional framework of the assessee company in light of the status of YRIPL (parent company) vis a vis other members/franchisees. As per the terms of the SIA approval, YRIPL and franchisees were equally obligated to make contribution of a fixed percentage to the assessee company. This requirement was incorporated as a precondition for the grant of permission to operate as a mutual concern. Clause 3 of the approval letter reads thus: "The franchises and Tricon Indian will both make contribution of a fixed percentage of their respective revenues (net of taxes) to the proposed New Company on regular basis:" However, drifting from this mandate, the Tripartite Agreement made it discretionary upon YRIPL to contribute to the common pool, thereby putting it at a higher pedestal than the franchisees. C....
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....violation of the terms of SIA approval. Moreover, even upon request for the grant of funds by the assessee company, YRIPL is not bound to accede to the request and enjoys a "sole and absolute" discretion to decide against such request. That members of a financial concern exercise mutual control over its management without the scope of prejudicial exercise of power by one class of members over the others is the quintessence for the existence of a mutual concern. The word "mutual" offers guidance to this effect. Literally understood, the word "mutual" points towards reciprocity and a mutual arrangement is one in which the members/parties have reciprocal rights or understanding or arrangement. An arrangement wherein one member is subjected to the absolute discretion of another, in such a manner that the entire liability may fall upon one whereas benefits are reaped by all, is antithesis to the mutual character in the eyes of law. 26. The contention advanced by the appellant that it is not mandatory for every member of the mutual concern to contribute to the common pool fails to advance the case of the appellant. It is no doubt true that every member of the mutual concern might not be....
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....es that the franchisees/contributors cannot claim a refund of their remaining amount as a matter of right. Be it noted that the raison d'etre behind the refund of surplus to the contributors or mandatory utilisation of the same in the subsequent assessment year is to reduce their burden of contribution in the next year proportionate to the surplus remaining from the previous year. Thus, the fulfilment of this condition becomes essential. In the present case, even if any surplus is remaining in a given assessment year, it is unlikely to reduce the liability of the franchisees in the following year as their liability to the extent of 5 per cent is fixed and non-negotiable, irrespective of whether any funds are surplus in the previous year. The only entity that could derive any benefit from the surplus funds is YRIPL, i.e. the parent company. This is antithetical to the third test of mutuality. 29. `Be that as it may, the dispensation predicated in the Tripartite Agreement may entail in a situation where YRIPL would not contribute even a single penny to the common pool and yet be able to derive profits in the form of royalties out of the purported mutual operations, created from the ....
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....t holds no water as YRIPL receives fixed percentage of royalty from the franchisees on the sales. We say so because if the franchisees could be obligated with a fixed percentage of contribution, 5 per cent in the present case, it is unfathomable as to why the same obligation ought not to apply to YRIPL. 33. Be it noted that the text of the Tripartite Agreement points towards the true intent of the formation of the assessee company as a step down subsidiary. For, clause C predicates thus: "C. TRIM has been established as a wholly owned step down subsidiary Tricon to manage of the retail restaurant business, the advertising medial and promotion at regional level and national level of KFC. Pizza Hut and other brands currently owned or acquired in future by Tricon and on its parents and of its associate company." In the absence of any ambiguity, the terms of a contract are to be understood in their ordinary and natural sense, thus revealing the true intent of the contracting parties. The aforequoted clause clearly points towards the fact that the assessee company was formed to manage business on behalf of the holding company. In its true form, it was not contemplated as a non-busi....
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....l concern (assessee company) and clubs. In the case of clubs, the operations are exempted from taxability because of the underlying notion that they operate for the common benefit of the members wishing to enter into a social exchange with no commercial intent. Further, all the members of the club not only have a common identity in the concern but also stand on an equal footing in terms of their rights and liabilities towards the club or the mutual undertaking. Such clubs are a means of social intercourse, as rightly observed by CIT (A) in the present case, and are not formed for the facilitation of any commercial activity. On the contrary, the purported mutual concern in the present case undertakes a commercial venture wherein contributions are accepted both from the members as well as non-members, as discussed earlier. Moreover, one member is vested with a myriad set of powers to control the functioning and interests of other members (franchisees), even to their detriment. Such an assimilation cannot be termed as a case of ordinary social intercourse devoid of commerciality. Re: question No. (ii): 36. Once it is conclusively determined that the assessee company had not operate....
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....even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable..." Furthermore, in Associated Power Co. Ltd. v. Commissioner of Income Tax (1996) 7 SCC 221, this Court again observed thus: "13. The application of the doctrine of diversion of income by reason of an overriding title is quite inapposite. The doctrine applies when, by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed..." Similarly, in The Commissioner of Income Tax, Kerala, Ernakulam v. The Travancore Sugars & Chemical Ltd. (1973) 3 SCC 274, this Court restated thus: "22... It is thus clear that where by the obligation income is diverted before it reaches the assessee, it is deductible. But, where the income is required to be applied to discharge an obligation after such income reaches the assessee it is merely a case of application of income to satisfy an obligation of payment and is therefore not deductible." 39. The CIT (A), while rejecting this ground, relied upon Sitaldas Tirathdas (supra), and observed thus: "... Where an assessee applies an income to disc....