ACIT (INTERNATIONAL TAXATION), NEW DELHI vs. M/S. DELOITTE TOUCHE TOHMASTU, GURGAON

This appeal by the revenue is preferred against the order of the CIT(A)-42, New Delhi dated 10.06.2016 pertaining to A.Y.2012-13

The substantive grievance of the revenue read as under :-

At the very outset counsel for the assessee stated that the issues raised in this appeal by the revenue are squarely covered in favour of the assessee and against the revenue by the decision of this Tribunal in earlier assessment years in the case of the assessee itself.

The DR fairly conceded to this.

We have carefully considered the orders of the authorities below. We find force in the contention of the Counsel. Even the AO at para-4 of his order has asked the assessee to explain whether the facts of the case are similar to that of earlier years and the assessee was called to explain why the assessment year A.Y.2012-13 should not be completed as per the assessment order of earlier years treating the receipts as FTS.

We find that this Tribunal in for A.Y. 2008-09, ITA No.5760/Del/2015 for A.Y.2009-10, ITA No.5759/Del/2015 for A.Y.2010-11 and ITA No.530/Del/2016 for A.Y.2011-12 has considered the quarrel and held as under :-

So, based on aforesaid reproduced relevant Articles of the Verein and principles of law as with regard to the question as to if the assessee was operating on the concept of mutuality, the first thing that can be observed is that the Tax Residency Certificate in favour of the assessee issued by authorities specifically mention that the source of income of the assessee is subscription fee. The Collins dictionary defines Subscription as “A subscription is an amount of money that you pay regularly in order to belong to an organization, to help a charity or campaign, or to receive copies of a magazine or newspaper.” The Black’s Law Dictionary defines Subscription as “The act of writing one's name under a written instrument; the affixing one's signature to any document, whether for the purpose of authenticating or attesting it, of adopting its terms as one's own expressions, or of binding one's self by an engagement which it contains. ” 10.1 Thus without importing any other meaning and rational to the meaning of subscription and same being the only source of income of the Verein, as recognized by the relevant tax authorities, it can be concluded that the only source of generating funds for the assessee was the subscription amount from its members-determined on the basis of proposed annual expenditure, which were paid by member firms, being subscribers to the Articles of Verein.

Then the invoices for the relevant year placed on record also show that the invoices were primarily raised for subscription according to Articles of Verein on account of operating expenditure, technology subscription or miscellaneous expenditure. The invoices are also raised for specific events organised and conducted by the assessee in furtherance of its recognised scope of activities and for the benefit of the Member Firms or the profession itself as a whole. These have been duly considered by the Id. F.A.A. while holding that no services were specifically provided by the assessee to its member in the nature of trading and the receipts were not in the nature of trading receipt. 11.1 The Bench is of the considered opinion that the contributions in the form of Operational Subscription, Technology subscription and Miscellaneous subscription, were only indicative of the three heads of subscription. The contributions were to be made by Member Firms for “total budgeted operating expenses Mere name of a head for contribution is not consequential to term the activity for which such contribution is made to be in nature of “services” as trading or technical services. It is the prospective beneficiaries and the benefit that is relevant. The prospective beneficiaries here were only the Member Firms of the Verein and tangible benefit derived from activities for which contribution was received was merely pursuit of excellence of the Member Firms in professional field. 11.2 The Ld. FAA has rightly concluded that these contributions were in the nature of reimbursements. As, they were pre determined on basis of budgeted expenditure. There is certainly force in the contention of Ld Senior Counsel for the assessee that in any case allowing the contributions as reimbursement should have been a separate ground of challenge in appeal which has not been taken by the Revenue.

The Bench is of firm view that the Ld. Assessing Officers failed to appreciate the various Articles of the Verein which were relevant to understand for what the Verein was composed, how it worked for the benefit of the members of Verein. Ld. AOs attached commerciality to the activities of Verein by calling the same trading activity and given finding in para 4.5 of the order of Ld. AO for AY 2008-09 that “the Verein has been set up for the rendering specific services to its members. It was mentioned in para no. 6 .that assessee has not provided agreement between the assessee and the, Indian members, however, the Articles in pursuance of which income is earned by the: assessee is dated 12.06.2003 it would be safe to assume that such technical services are chargeable to tax at 20% rate. ” Pertinent to observe here is that actually there was no bilateral agreement between the Assessee and its Member Firms but the Member Firms were supposed to file a Declaration of Acceptance only in a way subscribing to the Articles of Verien. A copy of such declaration with letter dated 8/2/2013 with the Ld AO and copy of same is on record at page no 26 of the PB for the year 2010-11.

The ld. Assessing Officers failed to appreciate that the Section 1 of the Verein, document defined “international name”, “international practice name”, “ related names” and Section 2.1 gave Member firms right to use these names and Section 2.2 provided certain responsibilities. These clauses establish that the Verein was formed for the benefit of the members to allow them being identified as member of the Verein in assuring their clients of certain professional standards being followed by the Member Firm. The only benefit members drive by way of paying subscription is to have benefit of the goodwill of the Verein as a whole, to which they are also members and adding to the goodwill, in terms of professional excellence on basis of shared information and experiences in the field of profession. The only objective of the Verein thus was to benefit its member in the professional field and to evolve better professional practices.

The Verein was established for specific purposes mentioned in Article 1.2 and they nowhere indicate that any element of commerciality between the manners themselves or by the members of the Verein and Verein itself with any outside members or clients was directly possible. Special reference can be made to Article 7.5 which provides that Verein shall not provide services to clients or direct or control the manner in which each member firm provides audit for other services to its clients and the Verein shall not share in the profit and losses of the member firms.

The manner in which the funds for the activities of the Verein were to be collected by way of contribution as per article 7.1, limiting financial obligations of the member firms to the Verein to the extent of annual contributions towards budgeted operating expenses as per article 7.4 and the distribution of funds on dissolution of the Verein or withdrawal or expulsion of the member firm from the Verein as per Article 11.2 firmly indicate that the Verein was working on principles of mutuality and not in a commercial venture on quid pro quo basis.

As with regard to the findings of the Id. AO on the basis of news reports that Verein has converted into the private company with limited guarantee the same being on hearsay had no evidentiary value. Though, on behalf of the assessee it has been submitted that another entity has come into existence for the purpose of certain local laws which has no concern with the present assessee.

The activities of the Verein were certainly not for social cause and cultural cause but pursuit of excellence in professional field is no less a noble cause. The services may be customized and focused but are not “special services in the sense that their utility is not restricted to few beneficiaries but across board all the member firms and substantially the profession as a whole is the beneficiary. The use of technology for benefit of all member firms commensurate with the scope and objectives of the Verein. The subscription charges cannot be said to be consideration for any specific service performed or for some specific members. Hon’ble Madras High Court in the case of South Indian Films Chambers of Commerce [1981,129 ITR 22 (Madras)] has held that provisions of Section 28(iii) of the Act will not be attracted in a case where profit making was only incidental and not the means of achieving the objects. In the case in hand rather there is no element of profit making by the assessee from its member firms or non-members.

In the case of Dy. Commissioner of Income Tax , 3(1), Mumbai Vs. KPMG (supra) relied by the assessee, the Mumbai Bench of the Tribunal has dealt with a similar matter and decided the same in favor of the said assessee which was an Indian Member Firm of KPMG International. The assesee had made payment to KPMG International. The Assessing Officer had concluded that expenses incurred by the assessee on account of alleged reimbursement of cost was in nature of royalty, therefore, such remittance constituted income of foreign company for purpose of Section 195 of the Act requiring deduction at source. The Commissioner (Appeal) had upheld the findings of Assessing officer but the Tribunal had remanded the matter and in remand proceedings, Commissioner held that KPMG international was a mutual association of assessee and its receipt could not constitute income chargeable to tax and assessee was not obliged to withheld any tax on such receipt. The revenue had preferred appeal which was dismissed by the Tribunal while relying the judgment of Hon’ble Supreme Court of India in Bankipur Club Ltd. (Supra) and Chelmsford Club (Supra) which have been rightly relied in the present case also by the Ld. First Appellate Authority while holding that the payments made to the Verein by Indian entities were in the nature of reimbursement and is exempt from taxation having been covered by the principle of mutuality.

This wholesome discussion makes it crystal clear that the Verein was functional on the principles of mutuality which Ld. Assessing Officer failed to appreciate while Ld. Ld. First Appellate Authority corrected the same in appeal. The element of commonality of identity between the Member Firms, in the mutual concern to evolve better professional practices. The completeness of identity between the member Firms due to contributions of Member Firms being only source of meeting expenditure for running the Verein and for activities of Verein and Non- profiteering, while obedience to mandate of the Verien are established from the matter on record.

Thus no fault can be found, on facts or law, in the findings of Ld FAA and there is no substance in the grounds of appeal raised by the Revenue. The order of Ld. FAA is upheld and the appeals of Revenue are dismissed.

Respectfully following the findings of this Tribunal (supra) this appeal of the revenue is dismissed.

Decision announced in the open court on 12.07.2022.