SOCIETE INTERNATIONALE DE TELECOMMUNICATIONS AERONAUTIQUES SC, MUMBAI V. DDIT (IT) 2(1), MUMBAI

CO 247/MUM/2013

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 0592 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 19 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 10-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 23-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 21-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Keywords: Source of fund
• Section: 143(3); 133A; 234B

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ./ I.T.A. NO.5723 /MUM/2012 ( / ASSESSMENT YEAR 2009-10 DY. DIT (IT) 2(1), ROOM NO. 120, SCINDIA HOUSE, IST FLOOR, BALLARD ESTATE, N.M. ROAD, MUMBAI 400 038. / VS. M/S SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAUTIQUES SC (S.I.T.A.), AFL HOUSE, GROUND FLOOR, LOK BHARTI COMPLEX, MAROL MAROSHI ROAD, MAROL, ANDHERI (E), MUMBAI -400 059. ./ PAN : AAFCS 2907Q ( / APPELLANT ) .. ( / RESPONDENT ) /C.O. NO. 247/MUM/2013 ARISING OUT OF ITA NO. 5723/MUM/2012 ( / ASSESSMENT YEAR 2009-10 M/S SOCIETE INTERNATIONAL DE TELECOMMUNICATIONS AERONAUTIQUES SC (S.I.T.A.), AFL HOUSE, GROUND FLOOR, LOK BHARTI COMPLEX, MAROL MAROSHI ROAD, MAROL, ANDHERI (E), MUMBAI -400 059. / VS. DY. DIT (IT) 2(1), ROOM NO. 120, SCINDIA HOUSE, IST FLOOR, BALLARD ESTATE, N.M. ROAD, MUMBAI 400 038. ./ PAN : AAFCS 2907Q CROSS OBJECTOR .. ( / RESPONDENT ) ITA 5723/M/12 & CO 247 /M/13 2 REVENUE BY SHRI NEIL PHILIP ASSESSEE BY : S HRI NITESH JOSHI / 012 3 45 / DATE OF HEARING : 23-03-2015 6789 3 45 / DATE OF PRONOUNCEMENT : 10-04-2015 [ :; / O R D E R PER R.C. SHARMA, AM : THIS IS AN APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. CIT(A) -11, MUMBAI DATED 14-06-20 12 FOR THE ASSESSMENT YEARS 2009-10 AND THE CROSS OBJECTION BY THE ASSESS EE IN THE MATTER OF ORDER PASSED U/S 144C (3) R.W.S. 143(3) OF THE INCOME TAX ACT, 1961. 2. FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE REVENUE IN THIS APPEAL:- 1) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT (A) IS CORRECT IN HOLDING THAT THE ASSESSEE IS COVERED BY THE PRINCIPAL OF MUTUALITY DESPITE THE FACT THAT: (I) THE ASSESSEE HAS MADE TRANSACTIONS WITH THE NON MEMBERS ALSO, AND (II) ASSESSEE HAS FAILED TO PRODUCE ANY DOCUMENTARY EVIDENCES REGARDING THE EXPENSES AND THEREBY, FAILED TO SATIS FY THE ASSESSING OFFICER THAT THE REVENUE RECEIVED WERE MA TCHED BY THE EXPENSES INCURRED. (2) THE APPELLANT PRAYS THAT THE ORDER OF THE LD. C IT (A) ON THE ABOVE GROUND(S) BE SET ASIDE AND THAT OF THE ASSESSING OF FICER RESTORED. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT ASSESSEE M/S SOCIETE INTERNATIONAL DE TELE COMMUNICATIONS AERONAUTIQUES SC (SITA) IS A COMPANY FORMED IN 1949 IN BELGIUM. IT HAS BRANCHES OVER 220 COUNTRIES. THE ASSESSEE I S CLAIMED TO BE A COOPERATIVE SOCIETY FOR THE BENEFIT OF INTERNATIO NAL AIRLINES TO PROVIDE A TELECOMMUNICATION NETWORK TO ALL THE AIRL INES. THE ASSESSEE HAD CLAIMED THAT IT IS A MUTUAL BENEFIT SO CIETY AND ITS ITA 5723/M/12 & CO 247 /M/13 3 INCOME IS EXEMPT. SURVEY U/S 133A WAS CARRIED OUT I N THE PREMISES OF THE ASSESSEE ON 29-11-2002. THE A.O. H AS HELD THAT THE ASSESSEE IS NOT A MUTUAL BENEFIT SOCIETY AND IT S INCOME IS NOT ENTITLED FOR EXEMPTION BEING AN INCOME OF MUTUAL CO NCERN.BY THE IMPUGNED ORDER, THE LD. CIT(A) HELD THAT THE ASSESS EE IS COVERED BY PRINCIPLE OF MUTUALITY. AGGRIEVED BY THIS THE REVENUE IS IN FURTHER APPEAL BEFORE US. 4. THE LD. A.R. HAS PLACED ON RECORD ORDER OF THE I TAT IN ASSESSEES OWN CASE IN ITA NO. 572/MUM/2010 FOR A.Y. 2006-07 DATED 14-11-2012 WHEREIN EXACTLY SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBU NAL IN FAVOUR OF ASSESSEE. OUR ATTENTION WAS ALSO INVITED TO THE GROUNDS RAISE D BY THE REVENUE IN THE APPEAL FOR A.Y. 2006-07 WHICH ARE EXACTLY SAME. 5. WE HAVE GONE THROUGH THE ORDER OF THE TRIBUNAL D ATED 14-11-2012 WHEREIN THE PRECISE OBSERVATION WITH REGARD TO TREA TING THE ASSESSEE AS COVERED BY THE PRINCIPLE OF MUTUALITY HAS BEEN DECI DED AS UNDER:- WE HAVE HEARD THE ID DR AS WELL AS THE LD SR COUNS EL FOR THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET. WE NOTE THAT THE ISSUE INVOLVED IN THE REVENUE'S APPEAL AS WELL AS IN THE CROSS OBJECTION OF THE ASSESSEE ARE CONSIDERED AND DECIDE D BY THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 1996-97 VIDE ORDER DATED 26.9.2012. 4 THE ONLY ISSUE RAISED BY THE REVENUE IS REGARDING THE PRINCIPLE OF MUTUALITY, WHICH HAS BEEN DECIDED BY THE TRIBUNAL I N ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 1996-97 AFTER A DETAIL ED DISCUSSION OF THE FACTS AS WELL AS LAW AND THE DECISIONS OF THE HON'B LE SUPREME COURT AS WELL AS THE HIGH COURT IN PARA 3.4 TO 3.24 . THE CO NCLUDING PART OF THE ORDER OF THE TRIBUNAL IN PARA 3.11.20. 3.12 TO 3.24 ARE AS UNDER: 3.11.20. WE HAVE NOTICED IN AN EARLIER PARA OF THIS ORDER THAT IN A CASE OF A NON-MUTUAL ORGANIZATION, A FEW TRANSACTIO NS WITH THE MEMBERS DO NOT CONVERT ITS NON-MUTUAL STATUS TO MUT UAL. IN THE LIKE MANNER, THE OTHERWISE STATUS OF MUTUALITY OF A N ORGANIZATION CANNOT BE DESTROYED BECAUSE OF A FEW TRANSACTION WI TH THE NON- MEMBERS. WHAT EXTENT OF PARTICIPATION BY NON-MEMBER S DESTROYS THE OTHERWISE MUTUAL STATUS OF AN ORGANIZATION OR W HAT 'EXTENT OF PARTICIPATION BY MEMBERS CHANGES THE OTHERWISE STAT US OF ITA 5723/M/12 & CO 247 /M/13 4 NON-MUTUALITY DEPENDS ON THE CONSIDERATION OF THE T OTALITY OF FACTS AND CIRCUMSTANCES OF EACH CASE. 3. 12. FALLOWING PRINCIPLES OF MUTUALITY CAN BE DED UCED FROM THE ABOVE DISCUSSION:- A. NO ONE CAN TRADE WITH HIMSELF AND HENCE THERE CA N BE NO PROFIT FROM SELF. B. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AN D SUCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES OR FACILI TIES ONLY TO ITS MEMBERS, THERE CAN INVARIABLY BE NO PROFIT MOTI VE. EVEN IF SOME PROFIT ENSUES TO THE ORGANIZATION FROM MEMBERS ON TRANSACTIONAL LEVEL, WHILE PURSUING THE OBJECTS OF THE ASSOCIATION IN PROVIDING GOODS AND SERVICES TO ITS MEMBERS, THE RE CAN BE NO TAX ON SUCH PROFIT ON THE BASIS OF THE PRINCIPLE OF MUTUALITY. THE REASON IS THAT THE CONTRIBUTORS TO THE PROFIT AND P ARTICIPATORS IN SUCH PROFIT ARE THE SAME PERSONS AS A CLASS. IF NO PROFIT FOLLOWS FROM THE TRANSACTIONS WITH THE MEMBERS, OBVIOUSLY, THERE CAN BE NO TAX EVEN DE HORS THE RULE OF MUTUALITY. C. IF. AN ORGANIZATION OF THE NATURE AS DISCUSSED I N POINT NO. B ABOVE, APART FROM ENTERING INTO TRANSACTIONS WITH I TS MEMBERS IN FURTHERANCE OF ITS OBJECTS, INVESTS ITS FUNDS OR M AKES DEPOSIT IN BONK, THE RETURN OR INTEREST ON SUCH INVESTMENT/DEP OSITS WILL NOT BE COVERED BY THE CHARACTER OF MUTUALITY AND SUCH A N AMOUNT WILL BE LIABLE TO TAX. IT IS SO FOR THE REASON THAT THE PRINCIPLE OF MUTUALITY WILL LACK AS THE CONTRIBUTORS OF SUCH INT EREST INCOME WILL NOT BE PARTICIPATING IN SUCH INCOME. HOWEVER, MUTUA L CHARACTER OF THE ORGANIZATION IN RESPECT OF TRANSACTIONS WITH IT S MEMBERS WILL CONTINUE AND INCOME THERE FROM WILL ENJOY EXEMPTION . D. WHEN INDIVIDUALS JOIN AND FORM AN ASSOCIATION AN D SUCH ASSOCIATION SELLS/PROVIDES GOODS/SERVICES/FACILITIE S ONLY TO PUBLIC AT LARGE, THAT IS, NON-MEMBERS, THERE MAY OR MAY NOT BE PROFIT MOTIVE. WHEN THERE IS PROFIT MOTIVE AND PROF ITS ACTUALLY FOLLOWS, SUCH PROFIT IS LIABLE TO TAX. IF THERE IS NO PROFIT MOTIVE BUT STILL PROFIT FOLLOWS, SUCH A PROFIT IS ALSO CHARGEA BLE TO TAX. IF, HOWEVER THERE IS NO PROFIT MOTIVE AND NO PROFIT RES ULTS, THERE WILL NOT BE ANY TAX BECAUSE OF NO INCOME AND NOT BECAUSE OF PRINCIPLE OF MUTUALITY. OBVIOUSLY IN SUCH A CASE, THE CONTRIB UTORS TO THE PROFIT, BEING THE CUSTOMERS AS A CLASS, WILL BE DIF FERENT FROM THE PARTICIPATORS IN THE PROFIT, BEING THE MEMBERS OF T HE ASSOCIATION AS A CLASS THEREBY BREACHING THE PRINCIPLE OF MUTUALIT Y. E. IF, IN A CASE OF ASSOCIATION OF THE NATURE AS DI SCUSSED IN POINT NO. D. ABOVE, THERE ARE BY AND LARGE TRANSACTIONS W ITH NON- MEMBERS, BUT THERE ARE ONLY A FEW TRANSACTIONS WITH MEMBERS AS ITA 5723/M/12 & CO 247 /M/13 5 WELL, THE NATURE OF THE ORGANIZATION AS NON-MUTUAL, WILL REMAIN AS SUCH. WHEREAS PROFITS FROM TRANSACTIONS WITH NON-ME MBERS WILL BE LIABLE TO TAX, PROFIT FROM TRANSACTIONS WITH THE ME MBERS WILL CONTINUE TO ENJOY EXEMPTION. WHEN THE ORGANIZATION PROVIDES FACILITIES AND SERVI CES BOTH TO ITS MEMBERS AND NON-MEMBERS, THE FOLLOWING CONSEQUENCES FLOW:- (I) IF THE 'OBJECT' OF SUCH AN ORGANIZATION IS 'TO EARN PROFIT', THERE IN NO MUTUALITY IN RESPECT OF TRANSACTIONS WITH MEMBER S. (II) WHEN THE 'OBJECT' OF THE ORGANIZATION IS 'NOT TO EARN PROFIT' BUT PROFIT EMERGES FROM TRANSACTIONS WITH MEMBERS AND N ON-MEMBERS, THE RULE OF MUTUALITY WILL NOT APPLY TO THE EXTENT OF TRANSACTIONS WITH MEMBERS UNLESS TRANSACTIONS WITH MEMBERS ARE PHENOMENALLY MINIMAL. (III) IN BOTH THE ABOVE CASES COVERED UNDER (I) AND (II) , PROFIT FROM TRANSACTIONS WITH NON-MEMBERS IS ALWAYS TAXABLE. 3.13. NOW WE WILL TEST THE FACTS OF THE INSTANT CAS E ON THE TOUCHSTONE OF THE BROODER PRINCIPLES OF MUTUALITY A S FIGURED OUT BY US IN PRECEDING PARA. IT IS OBSERVED THAT THE ASSES SEE EXTENDED FACILITIES TO AIRPORT AUTHORITIES. UNITED NATION. I FC. UNESCO AND EQUANT CUSTOMERS. IT IS EVIDENT FROM PAGE 27 PARA 7 4 OF THE 'STATEMENT OF FACTS' FILED BY THE ASSESSEE BEFORE T HE LEARNED CIT(A) THAT THE ASSESSEE COMPANY AND EQUANT SHARED NETWORK OUTSIDE INDIA IN ORDER TO ACHIEVE ECONOMIES OF SCALE. UNDER THIS ARRANGEMENT, THE COSTS INCURRED BY EACH PARTY WERE SHARED ACCORDING TO USAGE AND THESE COSTS RECHARGED WERE S HOWN IN ITS INCOME AND EXPENDITURE ACCOUNT. THE FACT THAT THE A SSESSEE RENDERED SERVICES TO EQUANT CUSTOMERS IS ALSO BORNE OUT FROM ITS LETTER DOTED 25. 03.2004. A COPY OF WHICH IS PLACED ON PAGE 29 ONWARDS OF THE PAPER BOOK. FROM PARA (IVC), IT CAN BE NOTICED THAT : 'SITA AND EQUANT SHARED NETWORK RESOURCES IN CERTAI N COUNTRIES OUTSIDE INDIA, IN ORDER TO MAXIMIZE SUCH ECONOMIES OF SCALE. UNDER THOSE ARRANGEMENTS, THE COSTS INCURRED BY EACH PART Y WERE SHARED ACCORDING TO USAGE'. IT SHOWS THAT NON-MEMBERS DID AVAIL THE FACILITIES EXTENDED BY THE ASSESSEE. 3.14. NOW LET US SEE THE VOLUME OF TRANSACTIONS WIT H SUCH NON- MEMBERS. THE ASSESSEE'S CONTENTION IS THAT IT WAS S IMPLY RECOVERING COSTS FROM ITS MEMBERS AND NON-MEMBERS F OR RENDERING SERVICES AND THERE WAS NO PROFIT MOTIVE. THE TOTAL OF COST RECOVERIES FROM GOVERNMENT, INTERNATIONAL ORGANIZAT IONS AND EQUANT CUSTOMERS, CONSTITUTING NON-MEMBERS AS A GRO UP, IS 0.07% OF THE TOTAL COST RECOVERIES. IT SHOWS THAT THE ASS ESSEE PROVIDED SERVICES TO ITS MEMBERS AT 99.93% OF ITS TOTAL OPER ATIONS. THIS FACT ITA 5723/M/12 & CO 247 /M/13 6 EVIDENCES THAT NON-MEMBERS AVAILED THE FACILITIES P ROVIDED BY THE ASSESSEE TO A VERY LIMITED EXTENT LESS THAN EVEN 0. 1% OF TOTAL. 3.15. AT THIS MOMENT, WE WILL TRY TO ASCERTAIN IF T HE ASSESSEE WAS SET UP WITH A PROFIT MOTIVE. WE HAVE PERUSED ARTICL ES OF ASSOCIATION OF THE ASSESSEE, A COPY OF WHICH IS PLA CED AT PAGE 116 ONWARDS OF THE PAPER BOOK. OBJECTS OF THE ASSESSEE ARE CONTAINED IN ARTICLE 3. MAIN OBJECT OF THE ASSESSEE AS PER CL AUSE A) OF ARTICLE 3 IS: 'TO FOSTER ALL COMMUNICATION AND INFORMATION PROCESSING, MATTERS DIRECTLY OR INDIRECTLY CONNECTED WITH THE T RANSMISSION AND PROCESSING OF ALL CATEGORIES OF INFORMATION REQUIRE D IN THE OPERATION OF THE AIR TRANSPORT INDUSTRY AND TO STUDY THE PROB LEMS RELATING TO THEM WITH THE AIM OF PROMOTING IN ALL COUNTRIES SAF E AND REGULAR AIR TRANSPORT'. OTHER OBJECTS OF THE ASSESSEE ARE O N THE SAME LINES. THERE IS NO REFERENCE TO ANY 'PROFIT MOTIVE' IN SUC H OBJECTS. IT HAS BEEN CONSISTENTLY CLAIMED BY THE ASSESSEE THAT IT H AS NOT EARNED ANY PROFIT FROM ITS TRANSACTIONS AND THE CONSIDERAT ION SO RECEIVED REPRESENTS ONLY COST RECOVERIES. 3.16. THE ABOVE FACTS INDICATE THAT PRIMARILY, THE ASSESSEE IS NOT SET UP WITH A PROFIT MOTIVE. SECONDLY, THE NON-ME MBERS AVAILING THE FACILITIES EXTENDED BY THE ASSESSEE ARE VERY IN SIGNIFICANT NOT EVEN 1% OF THE TOTAL. 3.17. THESE FACTS ARE DEFINITE POINTER TOWARDS THE ASSESSEE BEING A MUTUAL ORGANIZATION. UNDER SUCH CIRCUMSTANCES WE ARE OF THE CONSIDERED OPINION THAT THE PRINCIPLE OF MUTUALITY CANNOT BE DENIED IN ENTIRETY EVEN IN RESPECT OF TRANSACTIONS BY THE ASSESSEE WITH ITS MEMBERS. ACCORDINGLY, THE VIEW TAKEN BY TH E LEARNED CIT(A) CANNOT BE FAULTED WITH INSOFAR AS IT ACCEPTS THE RULE OF MUTUALITY QUA THE TRANSACTIONS WITH MEMBERS AND DEN IES THE SAME QUA THE TRANSACTIONS WITH NON-MEMBERS. 3.18. THE NEXT ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IN SUPPORT OF HIS CONTENTION THAT TH E MUTUALITY SHOULD BE REJECTED IN ENTIRETY WAS WITH REFERENCE T O ARTICLES 20 AND 50 OF THE ARTICLES OF ASSOCIATION OF THE ASSESS EE. IT WAS SUBMITTED THAT SINCE THE RETIRING OR RESIGNING MEMB ERS ARE NOT ENTITLED TO PARTICIPATE IN THE RESERVES TO SOME EXT ENT, THE MUTUALITY WAS LOST. IT WAS ARGUED THAT THE CONTRIBUTOR TO AND PARTICIPATOR IN THE SURPLUS FUND SHOULD BE CONSIDERED ON THE LEVEL OF INDIVIDUAL PERSONS. FOR THIS PROPOSITION, HE RELIED ON THE JUD GMENT IN THE CASE OF WANKANER JAIN SOCIAL, WELFARE SOCIETY (SUPRA). I N THIS CASE THE HON'BLE MADRAS HIGH COURT CONSIDERED THE FACTS IN W HICH THE OBJECT OF THE SOCIETY WAS TO CREATE AND CULTIVATE T HE HABIT OF SAVING AND THRIFT AMONG THE MEMBERS OF THE SOCIETY TO HELP BY WAY OF LOAN OR OTHER ASSISTANCE TO MEMBERS IN CASE OF A BO NA FIDE NEED. THE RULES AND REGULATIONS OF THE SOCIETY MADE IT CO MPULSORY FOR ITA 5723/M/12 & CO 247 /M/13 7 EVERY MEMBER TO PARTICIPATE IN THE SCHEME OF DEPOSI T. THE ASSESSING OFFICER DENIED THE MUTUALITY ON THE GROUN D THAT EVERY DEPOSITOR WAS NOT NECESSARILY BORROWER AND THEREFOR E, THE INTEREST PAID BY THE BORROWERS AND DISTRIBUTED AMONGST THE N ON-BORROWER MEMBERS DENTED THE MUTUALITY. THE HON'BLE MADRAS HI GH COURT UPHELD THIS PRINCIPLE BY HOLDING THAT SINCE THE INT EREST INCOME WAS AVAILABLE FOR BEING DISTRIBUTED AMONGST AL/ THE MEM BERS INCLUDING THOSE WHO HAD NOT BORROWED MONEYS, THE IDENTITY BET WEEN THE CONTRIBUTORS AND PARTICIPATORS WAS LOST AND HENCE T HE PRINCIPLE OF MUTUALITY WAS NOT SATISFIED. 3.19. THE QUESTION WHICH, THEREFORE, ARISES FOR OUR CONSIDERATION IS WHETHER THE MUTUALITY IS LOST BY REASON OF A MEMBER RESIGNING OR RETIRING FROM THE SOCIETY AND NOT GETTING ANY SHORE IN THE RESERVES. IN OTHER WORDS, THE LARGER QUESTION IS WHETHER THE CONTRIBUTORS TO THE FUND AND PARTICIPATORS IN THE FUND SHOULD BE TH E SAME PERSONS ON AN INDIVIDUAL LEVEL OR A CLASS LEVEL. THE HON 'B LE JURISDICTIONAL HIGH COURT IN THE CASE OF SIND CO-OPERATIVE HOUSING SOCIETY (SUPRA) CONSIDERED THE QUESTION OF MUTUALITY ON THE TRANSFER FEES RECEIVED BY THE CO-OPERATIVE SOCIETY FROM ITS MEMBE RS. IN THIS CASE, THE HON'BLE JURISDICTIONAL HIGH COURT RECOGNIZED 'C LASS OF MEMBER')' AS PARTICIPATORS AS WELL AS CONTRIBUTORS FOR MUTUAL ITY, INSTEAD OF THE 'INDIVIDUAL' MEMBERS. IT HAS BEEN HELD IN THIS CASE THAT THE FACT THAT ONLY SOME MEMBERS FROM THOSE WHO CONTRIBUTED M AY PARTICIPATE IN THE SURPLUS, IS IRRELEVANT AS LONG A S THE CLASS IS SAME. 3.20. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO RELIED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F KUMBAKONAM MUTUAL BENEFIT FUND LTD. (SUPRA) TO CONT END THAT THE PRINCIPLE OF MUTUALITY FAILS IF THE PERSONS WHO CO NTRIBUTE TO THE INCOME ARE NOT THE SAME PERSONS WHO PARTICIPATE IN THE SURPLUS OF THE ORGANIZATION. IN THIS CASE THE ASSESSEE CARRIED ON A BANKING BUSINESS RESTRICTED TO ITS SHAREHOLDERS, THAT IS, THE SHAREHOLDERS WERE ENTITLED TO PARTICIPATE IN VARIOUS RECURRING D EPOSITS SCHEMES OF THE ASSESSEE OR TO OBTAIN LOANS OF SECURITIES. T HESE RECURRING DEPOSITS CONSTITUTED THE MAIN SOURCE OF FUNDS OF TH E ASSESSEE FOR ADVANCING LOANS. OUT OF THE INTEREST REALIZED BY TH E ASSESSEE ON THE LOANS, INTEREST ON RECURRING DEPOSIT WAS PAID A ND THE BALANCE WAS DIVIDED AMONGST THE MEMBERS ACCORDING TO THEIR SHARE HOLDING. THE ITO DENIED THE PRINCIPLE OF MUTUALITY AND ASSESSED THE ENTIRE PROFIT TO TAX, WHICH VIEW HAS BEEN UPHEL D BY THE HON'BLE SUPREME COURT. 3.2I. WE ARE UNABLE TO SEE AS TO HOW THIS JUDGMENT ADVANCES THE CASE OF THE REVENUE. THE ASSESSEE IN THAT CASE RECE IVED RECURRING DEPOSITS AND MADE ADVANCES TO CERTAIN MEMBERS. THE SURPLUS WAS DISTRIBUTED AMONGST MEMBERS ACCORDING TO THEIR SHAREHOLDING ITA 5723/M/12 & CO 247 /M/13 8 AFTER MAKING A PROVISION FOR RESERVES ETC. THE SHAR EHOLDERS WHO WERE ENTITLED TO PARTICIPATE IN THE SURPLUS NEED NO T HAVE EITHER TOKEN LOANS OR MADE RECURRING DEPOSITS. FROM THESE FACTS, IT IS PALPABLE THAT THE SHAREHOLDERS WERE DIFFERENT AS A CLASS FROM THE PERSONS WHO AVAILED THE LOAN FACILITY AS A CLASS. I T WAS NOT NECESSARY FOR A SHAREHOLDER EITHER TO TAKE LOAN OR TO MAKE A RECURRING DEPOSIT. THUS THE CONTRIBUTORS TO THE FUN DS WERE DIFFERENT AS 0 GROUP FROM THE PARTICIPATORS, BEING, THE SHARE HOLDERS OF THE CLUB AS A GROUP. 3.22. IN VIEW OF THE FACT THAT ARTICLES 20 AND 50 D EBAR THE RETIRING OR RESIGNING MEMBERS FROM PARTICIPATING IN THE RESE RVES AVAILABLE CANNOT BE CONSIDERED AS A FACTOR ECLIPSING THE PRIN CIPLE OF MUTUALITY. IT IS SO FAR THE REASON THAT THE PERSONS WHO ARE ENTITLED TO SHARE AND PARTICIPATE IN THE RESERVES OF THE SOC IETY CONTINUE TO REMAIN THE SAME AS A GROUP OR CLASS OF PERSONS. THE MERE FACT THAT A PERSON AT THE TIME OF RESIGNA1T6N OR RETIREM ENT IS NOT ENTITLED TO SHARE IN THE RESERVES OF THE ORGANIZATI ON, WOULD NOT DAMAGE THE MUTUALITY SO LONG AS THE PERSONS WHO ARE ENTITL ED TO SHARE SUCH RESERVES CONTINUE TO BE THE MEMBERS AS A CLASS . 3.23. BE THAT AS IT MAY, IT IS OBSERVED THAT THIS F ACT HAS BEEN CONSIDERED BY THE TRIBUNAL WHILE DECIDING THE PRINC IPLE OF MUTUALITY IN RELATION TO ASSESSMENT YEARS 1974-75 A ND 1975-76. THE TRIBUNAL HAS ELABORATELY REPRODUCED AND DISCUSS ED THESE TWO ARTICLES IN ITS ORDER AND THEREAFTER RECORDED A POS ITIVE CONCLUSION GRANTING THE STATUS OF MUTUAL ORGANIZATION TO THE A SSESSEE. SAME IS TRUE IN RESPECT OF THE CREATION OF RESERVES AS W ELL. THE LEARNED AR HAS POINTED OUT THAT THE RESERVES SO REFERRED TO BY THE LEARNED DEPARTMENTAL REPRESENTATIVE WERE CREATED MANY YEARS AGO IN ACCORDANCE WITH THE BELGIAN STATUTORY REQUIREMENTS OR AROSE DUE TO REVALUATION OR REFURBISHMENT COST OR DUE TO CAPITALIZATION OF REFURBISHMENT COST . THE QUESTION OF RESERVES HAS ALSO BEEN DISCUSSED IN THE ORDER FOR A SSESSMENT YEARS 1974-75 AND 1975-76. IN VIEW OF THE CONCLUSIO N ARRIVED AT BY THE TRIBUNAL IN EARLIER YEARS HOLDING THAT THE M UTUALITY IS NOT DISTURBED BY REASON OF ARTICLE 20 AND 50 OF THE ASS ESSEE OR THE CREATION OF RESERVES, WE DO NOT DEEM IT NECESSARY T O DIVE DEEP INTO THE ARGUMENTS OF THE ID. DR WITH A VIEW TO BRING OU T ANY DECISION CONTRARY TO WHAT HAS ALREADY BEEN TAKEN BY THE TRIB UNAL IN EARLIER YEARS ON THE SAME FACTS AND CIRCUMSTANCES. 3.24. WE, THEREFORE, SUM UP OUR CONCLUSION ON GROUN D NO. 1 TAKEN BY THE REVENUE IN ITS APPEAL BY HOLDING THAT THE AS SESSEE IS COVERED BY THE PRINCIPLE OF MUTUALITY TO THE EXTENT OF ITS TRANSACTIONS WITH THE MEMBERS. INCOME FROM TRANSACT IONS WITH NON-MEMBERS IS OUTSIDE THE PURVIEW OF MUTUALITY.' ITA 5723/M/12 & CO 247 /M/13 9 4. FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL, WE HOLD THAT THE ASSESSEE IS COVERED BY THE PRINCIPLE OF MUTUALITY T O THE EXTENT OF ITS TRANSACTION WITH THE MEMBERS ONLY AND THE INCOME FR OM THE TRANSACTION OF NON MEMBERS IS OUTSIDE THE PURVIEW O F THE MUTUALITY. 6. THE LD. A.R. ALSO PLACED ON RECORD ORDER OF THE TRIBUNAL IN ITA NO. 3807/MUM/10 FOR A.Y. 2007-08 DATED 22-1-2014 AS WEL L AS ITA NO. 6651/MUM/11 FOR A.Y. 2008-09 ORDER DATED 31-01-2013 WHEREIN SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. 7. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR U NDER CONSIDERATION ARE EXACTLY SAME, WE DO NOT FIND ANY INFIRMITY IN THE O RDER OF THE LD. CIT(A) FOR TREATING THE ASSESSEE AS COVERED BY PRINCIPLE OF MU TUALITY. 8. IN THE C.O., THE ASSESSEE IS AGGRIEVED FOR TREAT ING THE REIMBURSEMENT COST AS INCOME. 9. THE LD. A.R. PLACED ON RECORD ORDER OF THE TRIBU NAL IN ITA NO. 572/MUM/10 FOR A.Y. 2006-07 DATED 14-11-2012 WHEREI N EXACTLY SIMILAR ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE HOLDING THAT REIMBURSEMENT COST IS INCOME. THE PRECISE OBSERVATION OF THE TRIBUNAL IS AS UNDER:- 6. WE HAVE HEARD THE LD. SR. COUNSEL FOR THE ASSES SEE AS WELL AS THE LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECO RD. IT IS FAIRLY ADMITTED BY BOTH THE PARTIES THAT THE ISSUE RAISED IN THE CROSS OBJECTION HAS ALSO BEEN CONSIDERED AND DECIDED BY T HIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 1996-97 . HOWEVER, THE ID SR COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT T HE TRIBUNAL HAS MADE CERTAIN OBSERVATIONS/REMARKS IN PARA 5.5 OF TH E ORDER FOR THE ASSESSMENT YEAR 1996-97 AT PAGE 77 OF THE ORDER REG ARDING THE CORRECTNESS OF THE INCOME DIVULGED FROM THE ACCOUNT S OF THE ASSESSEE. THE LD SR COUNSEL HAS SUBMITTED THAT IT MAY BE CASE OF NON VERIFIABILITY OF THE ITEMS; BUT IT CANNOT BE SAID THAT THE ACCOUN TS OF THE ASSESSEE ARE NOT CORRECT. THUS. THE ID SR COUNSEL HAS SUBMITTED THAT THERE IS NO MATERIAL ON RECORD DOES NOT REFLECT THE CORRECT INC OME AS HELD BY THE COMMISSIONER OF INCOME ON THE BASIS OF WHICH IT CAN BE CONCLUSIVELY SAID THAT THE ACCOUNTS OF THE ASSESSEE TAX(APPEALS} AND ACCEPTED BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 1996-97. HE HAS RE FERRED THE NOTES OF ACCOUNTS IN THE AUDIT REPORT AND SUBMITTED THAT THE ACCOUNTS OF THE ITA 5723/M/12 & CO 247 /M/13 10 HEAD OFFICE ARE AUDITED BY SOME OTHER AUDITORS AND THE AUDIT REPORT OF THE OTHER AUDITOR HAS BEEN RELIED UPON BY THE AUDIT OR OF THE ASSESSEE. 6.1 ON THE OTHER HAND, THE ID DR HAS SUBMITTED THAT THE ISSUE AS WELL AS THE FACTS ARE IDENTICAL IN THE ASSESSMENT Y EAR UNDER CONSIDERATION TO THOSE OF ASSESSMENT YEAR 1996-97 A ND THEREFORE, THE TRIBUNAL. AFTER TAKING NOTE OF THE FACT THAT IT WAS FOUND THAT BOTH SIDES OF THE ASSESSEE'S INCOME AND EXPENDITURE ARE MATCHI NG PAISA TO PAISA AND NO UNDER RECOVERY OR OVER RECOVERY SHOWN AS AN ASSET OR LIABILITY IN ITS BALANCE SHEET TURNED DOWN THE CONTENTION OF THE ASSESSEE REGARDING THE ALLOCATION OF HO EXPENSES. 7. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE FACTS REGARDIN G THE ISSUE RAISED BY THE ASSESSEED IN THE CO ARE IDENTICAL. 7.1 THE ISSUE RAISED IN GROUND NO.L AND 2 OF THE CO HAS BEEN DEALT BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 1996-97 IN PARAS 5.4 & 5.5 AS UNDER: 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THERE CAN BE NO DISPUT E ABOUT THE FACT THAT ANY AMOUNT RECEIVED BY WAY OF REIMBURSEME NT, NOT CONTAINING ANY ELEMENT OF PROFIT, IS NOT LIABLE TO TAX. THIS PRINCIPLE HAS BEEN LAID DOWN BY THE HON'BLE JURISDI CTIONAL HIGH COURT IN CIT V. SIEMENS AKTIONGESELLSCHAFT (2009) 1 77 TAXMAN 81 (BOM.)] AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA AND MAHINDRA LTD. V. DCFT ((2009) 313 ITR (AT) 263 (MUM) (S8)]. IN THESE CASES, IT HAS BEEN HELD THAT WHEN A PARTICULAR AMOUNT OF EXPENDITURE IS INCURRED AND TH E SAME SUM IS REIMBURSED AS SUCH, THAT CANNOT BE CONSIDERED AS HAVING ANY PART OF IT IN THE NATURE OF INCOME. THIS BRINGS US TO THE PRINCIPLE THAT IF THERE IS CERTAIN REIMBURSEMENT OF EXPENSES AS SUCH, WITHOUT THERE BEING ANY MARK UP INCLUDED IN SUCH REIMBURSEMENT THERE CANNOT BE ANY QUESTION OF EARNI NG ANY INCOME LIABLE TO TAX FROM SUCH REIMBURSEMENT. WE AG REE WITH THE LEARNED AR ON THIS PRINCIPLE THAT THE REIMBURSE MENT OF EXPENSES DOES NOT LEAD TO ANY INCOME AND IN SUCH A SITUATION THERE CAN BE NO QUESTION OF ANY INCOME EMBEDDED IN SUCH REIMBURSEMENT. 5. HOWEVER WE FIND THAT THIS PRINCIPLE IS NOT APPLI CABLE IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. IT IS OBSERVED FROM THE STATEMENTS OF SHRI S. GOPALAKRISHNAN AND MR. AN DREW C1EAK RECORDED AT THE TIME OF SURVEY THAT THE BASIS OF AL LOCATION OF COSTS TO DIFFERENT COUNTRIES BY THE HO WAS NOT KNOWN. IT WAS ADMITTED THAT THE HO ALLOCATES A PROPORTION OF ITS GENERAL A DMINISTRATIVE ITA 5723/M/12 & CO 247 /M/13 11 AND FINANCING COST TO OTHER BRANCHES TO EXACTLY MAT CH THE TOTAL COST INCURRED IN EACH COUNTRY IN EACH MONTH. IT WAS ALSO ADMITTED THAT THERE WAS NO VERIFICATION OF THE EXPE NSES ALLOCATED BY THE HO BECAUSE THE BASIS OF CHARGE WAS KNOWN TO HO ALONE AND THE DETAILS OF SUCH COMPUTATION WERE NOT PROVID ED TO THE INDIAN BRANCH. ON A QUESTION ABOUT THE RECORDING OF REVENUES, IT WAS ADMITTED THAT THE ENTRY WAS PASSED ON THE RECEI PT OF INTIMATION FROM HO AND HOW SUCH REVENUES ARE DETERM INED, WAS NOT KNOWN. IN RESPONSE TO QUESTION NOS. 12 AND 13, SHRI GOPALAKRISHNAN ADMITTED THAT ACCOUNTS WERE FINALIZE D BY THE HO AND AFTER FINALIZATION OF SUCH ACCOUNTS, A SIGNED C OPY OF THE BALANCE SHEET WAS SENT TO THE BRANCH OFFICE IN INDI O. THE LEARNED AR HAS INVITED OUR ATTENTION TOWARDS ITS LETTER DOT ED 5.02.2005 ADDRESSED TO THE ID. CIT(A) ABOUT THE BASIS OF ALLO CATION. FROM THIS LETTER IT IS CRYSTAL CLEAR THAT THE ASSESSEE S TATED BEFORE THE LEARNED OT(A) THAT 'THE GLOBAL COST RECOVERIES MADE BY THE SIT A HO ARE ALLOCATED TO ALL OF THE SITA BRANCHES WORLDW IDE SO AS TO MATCH THE COSTS BORNE BY THOSE BRANCHES. THUS, THE OVERALL EFFECT OF ALLOCATING HEAD OFFICE COSTS TO THE SITA BRANCHE S WORLDWIDE IS TO INCREASE BOTH THE BRANCH COSTS AND ALSO THE CORR ESPONDING COST RECOVERIES WHICH ARE ALLOCATED TO EACH BRANCH TO MATCH THOSE COSTS'. FROM THIS LETTER IT IS ALSO OBSERVED THAT THE BASIS OF ALLOCATION OF COSTS AMONGST VARIOUS BRANCHES IS KNO WN ONLY AT THE HO LEVEL WITH NO INTIMATION TO THE INDIAN BRANC H ABOUT SUCH BASIS. AT THIS STAGE, WE WOULD LIKE TO HIGHLIGHT TH AT INDIA IS CONCERNED ONLY WITH THE TAX REVENUES RELATING TO IN DIAN OPERATIONS. UNLESS IT IS PROPERLY ESTABLISHED THAT 01/ THE EXPENSES CLAIMED BY THE INDIAN BRANCH REPRESENTS TH E ASSESSEES SHORE IN A PROPER MANNER, IT CANNOT BE ACCEPTED THA T THE ALLOCATION WAS MADE ON SOME RATIONAL BASIS. HERE IS A CASE IN WHICH BOTH THE SIDES OF THE ASSESSEE'S INCOME AND E XPENDITURE ACCOUNT ARE TALLYING PAISA TO PAISA. THE LEARNED AR SUBMITTED THAT THE COST AND REVENUES ARE MATCHED AND IF THERE IS ANY NET OVER-RECOVERY OR NET UNDER-RECOVERY, THE SAME IS CA RRIED FORWARD AND AT THE END OF THE YEAR THE AUDITED ACCOUNTS REF LECT CUMULATIVE UNDER-RECOVERY OR OVER-RECOVERY FOR THE YEAR. THIS SUBMISSION WAS MADE BY READING FROM THE ASSESSEE'S AFORESAID LETTER DOTED 05.02.2005 ADDRESSED TO THE CIT{A}. ON A SPECIFIC QUESTION AS TO WHAT IS THE AMOUNT OF UNDER-RECOVERY OR OVER- RECOVERY IN THE ACCOUNTS OF THE ASSESSEE FOR THIS Y EAR OR ANY EARLIER OR LATER YEAR, THE LEARNED AR FAILED TO POI NT OUT ANY SUCH AMOUNT. WE HAVE PERUSED THE INCOME AND EXPENDITURE ACCOUNT AND BALANCE SHEET OF THE ASSESSEE. IT IS OBSERVED T HAT BOTH THE SIDES OF THE ASSESSEE'S INCOME AND EXPENDITURE ARE MATCHING PAISA TO PAISA AND THERE IS NO UNDER-RECOVERY OR OV ER-RECOVERY SHOWN AS AN ASSET OR A LIABILITY IN ITS BALANCE SHE ET. FURTHER. WHEN WE CONSIDER THE FACT THAT THE ACCOUNTS OF THE ASSESSEE WERE MAINTAINED AT THE HO LEVEL, THERE REMAINS NOTHING T O DOUBT THE ITA 5723/M/12 & CO 247 /M/13 12 CORRECTNESS VIEW TAKEN BY THE LEARNED CIT(A) THAT T HE ACCOUNTS OF THE ASSESSEE DO NOT DIVULGE THE CORRECT INCOME. NOT ONLY THE BASIS OF ALLOCATION OF EXPENSES BUT ALSO THAT OF TH E REVENUE, AS DONE BY THE HO IS NOT KNOWN TO THE ASSESSEE. UNDER SUCH CIRCUMSTANCES, THE CONTENTION THAT THE ASSESSEE WAS ONLY RECOVERING COSTS FROM ITS NON-MEMBERS AND THERE WAS NO PROFIT ELEMENT IN IT, IS NOT OPEN FOR VERIFICATION. 7.2 WHEN THE TRIBUNAL HAS DECIDED THIS ISSUE AFTER CONSIDERING THE RIVAL CONTENTION AND RELEVANT FACTS, THEN IN THE AB SENCE OF ANY NEW FACTS OR MATERIAL, WE DO NOT FIND ANY SUBSTANCE IN THE CO NTENTION OF THE LD SR COUNSEL FOR THE ASSESSEE REGARDING THE MARKS OF THE TRIBUNAL IN THE EARLIER YEAR. MOREOVER, THE SAME DOES NOT EFFECT TH E FINDINGS OF THE TRIBUNAL ON THIS ISSUE. 10. THE LD. A.R. ALSO PLACED ON RECORD ORDER OF THE TRIBUNAL IN ITA NO. 3807/MUM/10 FOR A.Y. 2007-08 DATED 22-1-2014 WHEREI N THIS ISSUE HAS BEEN DECIDED AGAINST OF THE ASSESSEE AT PARA 7 TO 9 AT P AGE NO. 10 TO 13 OF THE ORDER. AS THE FACTS AND CIRCUMSTANCES DURING THE Y EAR UNDER CONSIDERATION ARE SAME, RESPECTFULLY FOLLOWING THE ORDER OF THE T RIBUNAL IN ASSESSEES OWN CASE WE HOLD THAT REIMBURSEMENT OF COST WAS NOT INC OME OF ASSESSEE. 11. THE GROUND RAISED WITH REGARD TO ESTIMATING THE PROFIT OF THE ASSESSEE COMPANY AT 5% OF GROSS AMOUNT RECOVERED FROM NON-ME MBERS IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNAL I N ITA NO. 6651/MUM/11 FOR A.Y. 2008-09 DATED 31-01-2013. PRECISE OBSERVA TION OF THE TRIBUNAL AT PARA 8 TO 9 AT PAGE NO. 8 TO 11 OF THE ORDER IS AS UNDER:- 8. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE ISSUE RAISED IN THE CROSS OBJECTION HAS BEEN DECIDE D AGAINST THE ASSESSEE IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 1996-97 AND IN THE ASSESSMENT YEAR 2006-07, DECIDED BY THE TRIBUNA L, VIDE ORDER DATED 14 TH NOVEMBER 2012. THE RELEVANT FINDINGS GIVEN BY THE TRIBUNAL IN RELATION TO GROUNDS NO.1 AND 2 OF THE CROSS OBJECTI ON ARE AS UNDER:- '7 HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE FACTS REGARDIN G THE ISSUE RAISED BY THE ASSESSEED IN THE CO ARE IDENTICAL. ITA 5723/M/12 & CO 247 /M/13 13 7.1 THE ISSUE RAISED IN GROUND NO.1 AND 2 OF THE CO HAS BEEN DEALT BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 1996- 97 IN PARAS 5.4 & 5.5 AS UNDER: 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THERE CAN BE NO DISPUT E ABOUT THE FACT THAT ANY AMOUNT RECEIVED BY WAY OF REIMBURSEME NT, NOT CONTAINING ANY ELEMENT OF PROFIT, IS NOT LIABLE TO TAX. THIS PRINCIPLES HAS BEEN LAID DOWN BY THE HONBLE JURISD ICTIONAL HIGH COURT IN CIT V. SIEMENS AKTIONGESELLSCHAFT [(2009) 177 TAXMAN 81 (8OM.)J AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA AND MAHINDRA LTD. V. DCFT [(2009) 313 ITR (AT) 263 (MUM) (SB). IN THESE CASES, IT HAS BEEN HELD THAT W HEN A PARTICULAR AMOUNT OF EXPENDITURE IS INCURRED AND TH E SAME SUM IS REIMBURSED AS SUCH, THAT CANNOT BE CONSIDERED AS HAVING ANY PART OF IT IN THE NATURE OF INCOME. THIS BRINGS US TO THE PRINCIPLES THAT IF THERE IS CERTAIN REIMBURSEMENT OF EXPENSES AS SUCH, WITHOUT THERE BEING ANY MARK UP INCLUDED IN SUCH REIMBURSEMENT, THERE CANNOT BE ANY QUESTION OF EARN ING ANY INCOME LIABLE TO TAX FROM SUCH REIMBURSEMENT. WE AG REE WITH THE LEARNED A.R. ON THIS PRINCIPLES THAT THE REIMBU RSEMENT OF EXPENSES DOES NOT LEAD TO ANY INCOME AND IN SUCH A SITUATION THERE CAN BE NO QUESTION OF ANY INCOME EMBEDDED IN SUCH REIMBURSEMENT. 5.5. HOWEVER WE FIND THAT THIS PRINCIPLES IS NOT AP PLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. IT IS OBSERVED FROM THE STATEMENTS OF SHRI S. GOPALAKRISHNAN AND MR. AN DREW CLEAK RECORDED AT THE TIME OF SURVEY THAT THE BASIS OF AL LOCATION OF COSTS TO DIFFERENT COUNTRIES BY THE HO WAS NOT KNOWN. IT WAS ADMITTED THAT THE HO ALLOCATES A PROPORTION OF ITS GENERAL A DMINISTRATIVE AND FINANCING COST TO OTHER BRANCHES TO EXACTLY MAT CH THE TOTAL COST INCURRED IN EACH COUNTRY IN EACH MONTH. IT WAS ALSO ADMITTED THAT THERE WAS NO VERIFICATION OF THE EXPE NSES ALLOCATED BY THE HO BECAUSE THE BASIS OF CHARGE WAS KNOWN TO HO ALONE AND THE DETAILS OF SUCH COMPUTATION WERE NOT PROVID ED TO THE INDIAN BRANCH. ON A QUESTION ABOUT THE RECORDING OF REVENUES, IT WAS ADMITTED THAT THE ENTRY WAS PASSED ON THE RECEI PT OF INTIMATION FROM HO AND HOW SUCH REVENUES ARE DETERM INED, WAS NOT KNOWN. IN RESPONSE TO QUESTION NOS. 12 AND 13, SHRI GOPALA KRISHNAN ADMITTED THAT ACCOUNTS WERE FINALIZED BY THE HO AND AFTER FINALIZATION OF SUCH ACCOUNTS, A SIGNED COPY OF THE BALANCE SHEET WAS SENT TO THE BRANCH OFFICE IN INDIA. THE LEARNED AR HAS INVITED OUR ATTENTION TOWARDS ITS LETTER DATED 5.02 .2005 ADDRESSED TO THE ID. CIT(A) ABOUT THE BASIS OF ALLO CATION. FROM ITA 5723/M/12 & CO 247 /M/13 14 THIS LETTER IT IS CRYSTAL CLEAR THAT THE ASSESSEE S TATED BEFORE THE LEARNED CIT( A) THAT 'THE GLOBAL COST RECOVERIES MA DE BY THE SITA HO ARE ALLOCATED TO ALL OF THE SITA BRANCHES WORLDW IDE SO AS TO MATCH THE COSTS BORNE BY THOSE BRANCHES. THUS, THE OVERALL EFFECT OF ALLOCATING HEAD OFFICE COSTS TO THE SITA BRANCHE S WORLDWIDE IS TO INCREASE BOTH THE BRANCH COSTS AND ALSO THE CORR ESPONDING COST RECOVERIES WHICH ARE ALLOCATED TO EACH BRANCH TO MATCH THOSE COSTS'. FROM THIS LETTER IT IS ALSO OBSERVED THAT THE BASIS OF ALLOCATION OF COSTS AMONGST VARIOUS BRANCHES IS KNOWN ONLY AT THE HO LEVEL WITH NO INTIMATION TO THE INDIAN BRANCH ABOUT SUCH BASIS. AT THIS STAGE, WE WOULD LIKE TO HIGHLIGHT THAT INDIA I S CONCERNED ONLY WITH THE TAX REVENUES RELATING TO INDIAN OPERATIONS . UNLESS IT IS PROPERLY ESTABLISHED THAT ALL THE EXPENSES CLAIMED BY THE INDIAN BRANCH REPRESENTS THE ASSESSEE'S SHARE IN A PROPER MANNER, IT CANNOT BE ACCEPTED SOCIETE INTERNATIONAL DE TELECOM MUNICATIONS AERONAUTIQUES THAT THE ALLOCATION WAS MADE ON SOME RATIONAL BASIS. HERE IS A CASE IN WHICH BOTH THE SIDES OF TH E ASSESSEE'S INCOME AND EXPENDITURE ACCOUNT ARE TALLYING PAISA T O PAISA. THE LEARNED AR SUBMITTED THAT THE COST AND REVENUES ARE MATCHED AND IF THERE IS ANY NET OVER-RECOVERY OR NET UNDER- RECOVERY, THE SAME IS CARRIED FORWARD AND AT THE END OF THE YEAR THE AUDITED ACCOUNTS REFLECT CUMULATIVE UNDER-RECOVERY OR OVER- RECOVERY FOR THE YEAR. THIS SUBMISSION WAS MADE BY READING FROM THE ASSESSEE'S AFORESAID LETTER DATED 05.02.2005 ADDRES SED TO THE CIT(A). ON A SPECIFIC QUESTION AS TO WHAT IS THE AM OUNT OF UNDER- RECOVERY OR OVER-RECOVERY IN THE ACCOUNTS OF THE AS SESSEE FOR THIS YEAR OR ANY EARLIER OR LATER YEAR, THE LEARNED AR F AILED TO POINT OUT ANY SUCH AMOUNT. WE HAVE PERUSED THE INCOME AND EXPENDITURE ACCOUNT AND BALANCE SHEET OF THE ASSESS EE. IT IS OBSERVED THAT BOTH THE SIDES OF THE ASSESSEES INCO ME AND EXPENDITURE ARE MATCHING PAISA TO PAISA AND THERE I S NO UNDER- RECOVERY OR OVER-RECOVERY SHOWN AS AN ASSET OR A LI ABILITY IN ITS BALANCE SHEET. FURTHER, WHEN WE CONSIDER THE FACT T HAT THE ACCOUNTS OF THE ASSESSEE WERE MAINTAINED AT THE HO LEVEL, THERE REMAINS NOTHING TO DOUBT THE CORRECTNESS VIEW TAKEN BY THE LEARNED CIT(A) THAT THE ACCOUNTS OF THE ASSESSEE DO NOT DIVULGE THE CORRECT INCOME. NOT ONLY THE BASIS OF ALLOCATIO N OF EXPENSES BUT ALSO THAT OF THE REVENUE, AS DONE BY THE HO IS NOT KNOWN TO THE ASSESSEE UNDER SUCH CIRCUMSTANCES, THE CONTENTI ON THAT THE ASSESSEE WAS ONLY RECOVERING COSTS FROM ITS NON-MEM BERS THERE WAS NO PROFIT ELEMENT IN IT, IS NOT OPEN FOR VERIFI CATION. 7.2 WHEN THE TRIBUNAL HAS DECIDED THIS ISSUE AFTER CONSIDERING RIVAL CONTENTION AND RELEVANT FACTS, THEN IN THE AB SENCE OF ANY NEW FACTS OR MATERIAL, WE DO NOT FIND ANY SUBSTANCE IN THE ITA 5723/M/12 & CO 247 /M/13 15 CONTENTION OF THE LD SR COUNSEL FOR THE ASSESSEE RE GARDING THE REMARKS OF THE TRIBUNAL IN THE EARLIER YEAR. MOREOV ER, THE SAME DOES NOT EFFECT THE FINDINGS OF THE TRIBUNAL ON THI S ISSUE. 7.3 AS REGARDS GROUND NO.2 TO 9 OF THE CO ARE CONCE RNED, THE TRIBUNAL HAS CONSIDERED THE SAME IN PARA 5.6 & 5.7 AS UNDER: '5.6. THE LEARNED AR ALSO PRESSED INTO SERVICE THE PROVISIONS OF SECTION 44C TO CONTEND THAT WHERE THE BASIS OF ALLOCATION OF HO EXPENDITURE IS NOT KNOWN, DEDUCTIO N FOR SUCH HO EXPENSES HAS TO BE MADE IN TERMS OF SECTION 44C. IN THE LIGHT OF THIS SECTION, THE LEARNED AR CONTEN DED THAT ONLY A SMALL PORTION OF THE HO EXPENSES OUGHT TO HAVE BEEN DISALLOWED BY THE ID . CIT(A) INSTEAD OF COMPUTING INCOME AT 5% OF THE GRO SS RECEIPTS. 5.7. WE ARE NOT CONVINCED WITH THIS CONTENTION FOR THE REASON THAT SECTION 44C ONLY TALKS OF HO EXPENSES, WHICH MEAN EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENDITU RE INCURRED BY THE ASSESSEE OUTSIDE INDIA INCLUDING EXPENDITURE IN RESPECT OF RENT, RATES, REPAIRS ETC. IT IS ONLY THE ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENS ES WHICH IS COVERED WITHIN THE PURVIEW OF ITA NO. 572/MUM/2010 & CO NO.159/MUM/2010 SOCIETE INTERNATIONAL DE TELECOMMUNI-CATIONS AERONAUTIQUES SECTION 44C. ON THE CONTRARY, WE ARE CONSIDERING A CASE IN WHICH NOT ONLY THE BASIS OF ALLOCATION OF EXPENSES IS NOT KNOWN, BUT THE BASIS OF ALLOCATION OF INCOME IS EQU ALLY UNKNOWN AT INDIA LEVEL. THIS BRINGS US TO A SITUATI ON WHERE NEITHER THE INCOME SIDE NOR THE EXPENDITURE SIDE OF THE ASSESSEE'S INCOME AND EXPENDITURE ACCOUNT IS FULLY CAPABLE OF VERIFICATION. IT IS IN SUCH CIRCUMSTANCES THAT R ULE 10 OF INCOME-TAX RULES, 1962 COMES TO THE RESCUE OF THE R EVENUE FOR DETERMINATION OF INCOME IN THE CASE OF NON-RESI DENTS. IT IS THIS VERY RULE WHICH HAS BEEN --~.-'. VOKED BY T HE ASSESSING OFFICER AND ALSO APPLIED BY E LEARNED CIT ( A) IN ESTIMATING THE INCOME OF THE ASSESSEE. IN OUR CONSI DERED OPINION THE LEARNED CIT(A) WAS MORE THAN JUSTIFIED IN ESTIMATING THE INCOME AT 5% OF THE GROSS RECEIPTS F ROM NON- MEMBERS. THESE GROUNDS TAKEN BY THE ASSESSEE ARE NO T ALLOWED. ' 8. FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL, WE FIND NO MERIT IN THE GROUND NO 1 TO 9 OF THE CO RAISED BY THE ASSESS EE; ACCORDINGLY, THE SAME ARE DISMISSED. ' ITA 5723/M/12 & CO 247 /M/13 16 9. THUS, RESPECTFULLY FOLLOWING THE EARLIER YEARS ORDER OF THE TRIBUNAL, WE DO NOT FIND ANY REASON TO DEVIATE FROM SUCH FINDINGS AND THE GROUNDS NO. 1 AND 2 OF THE CROSS O BJECTION STAND DISMISSED. 12. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR WAS SAME, RESPECTFULLY FOLLOWING THE ORDER OF TRIBUNAL IN ASSESSEES OWN C ASE, WE UPHOLD THE ACTION OF LOWER AUTHORITIES ESTIMATING THE PROFIT OF ASSESSEE COMPANY AT 5 OF GROSS AMOUNT RECOVERED FROM NON-MEMBERS. 13. THE NEXT ISSUE IN THE C.O. RELATES TO THE APPLI CABILITY OF PROVISIONS OF SECTION 44C OF THE ACT TO THE ASSESSEE COMPANY IN R ESPECT OF CERTAIN EXPENSES INCURRED AT HEAD OFFICE LEVEL WHICH MAY NOT FALL WI THIN THE DEFINITION OF HEAD OFFICE EXPENDITURE AS DEFINED IN SECTION 44C OF TH E ACT. 14. WE FIND THAT THIS ISSUE IS ALSO COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ITA NO. 572/MUM/10 FOR A.Y. 2006 -07 DATED 14-11-2012. PRECISE OBSERVATION OF THE TRIBUNAL AT PARA 7.3 TO 8 AT PAGE NO. 10 TO 11 OF THE ORDER IS AS UNDER:- 7.3 AS REGARDS GROUND NO. 2 TO 9 OF THE C.O ARE C ONCERNED, THE TRIBUNAL HAS CONSIDERED THE SAME IN PARA 5.6 & 5.7 AS UNDER: 5.6. THE LEARNED AR ALSO PRESSED INTO SERVICE THE P ROVISIONS OF SECTION 44C TO CONTEND THAT WHERE THE BASIS OF ALLOCATION O F HO EXPENDITURE ;S NOT KNOWN, DEDUCTION FOR SUCH HO EXPENSES HAS TO BE MADE IN TERMS OF SECTION 44C. IN THE LIGHT OF THIS SECTION, THE LEAR NED AR CONTENDED THAT ONLY A SMALL PORTION OF THE HO EXPENSES OUGHT TO H AVE BEEN DISALLOWED BY THE LD. CIT(A) INSTEAD OF COMPUTING INCOME AT 5% OF THE GROSS RECEIPTS. 5.7. WE ARE NOT CONVINCED WITH THIS CONTENTION FOR THE REASON THAT SECTION 44C ONLY TALKS OF HO EXPENSES, WHICH MEAN E XECUTIVE AND GENERAL ADMINISTRATIVE EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA INCLUDING EXPENDITURE IN RESPECT OF RENT, RAT ES, REPAIRS ETC. IT IS ONLY THE ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENS ES WHICH IS COVERED WITHIN THE PURVIEW OF SECTION 44C. ON THE CONTRARY, WE ARE CONSIDERING A CASE IN WHICH NOT ONLY THE BASIS OF ALLOCATION OF E XPENSES IS NOT KNOWN, BUT THE BASIS OF ALLOCATION OF INCOME IS EQUALLY UN KNOWN AT INDIO LEVEL. THIS BRINGS US TO A SITUATION WHERE NEITHER THE INC OME SIDE NOR THE ITA 5723/M/12 & CO 247 /M/13 17 EXPENDITURE SIDE OF THE ASSESSEE'S INCOME AND EXPEN DITURE ACCOUNT IS FULLY CAPABLE OF VERIFICATION. IT IS IN SUCH CIRCUM STANCES THAT RULE 10 OF INCOME-TAX RULES, 1962 COMES TO THE RESCUE OF THE R EVENUE FOR DETERMINATION OF INCOME IN THE CASE OF NON-RESIDENT S. IT IS THIS VERY RULE WHICH HAS BEEN INVOKED BY THE ASSESSING OFFICER AND ALSO APPLIED BY THE LEARNED CIT(A) IN ESTIMATING THE INCOME OF THE ASSE SSEE. IN OUR CONSIDERED OPINION THE LEARNED CIT(A) WAS MORE THAN JUSTIFIED IN ESTIMATING THE INCOME AT 5% OF THE GROSS RECEIPTS F ROM NON-MEMBERS. THESE GROUNDS TAKEN BY THE ASSESSEE ARE NOT AILOWED .' 8. FOLLOWING THE EAR1IER ORDER OF THE TRIBUNAL, WE FIND NO MERIT IN THE GROUND NO 1 TO 9 OF THE CO RAISED BY THE ASSESSEE, ACCORDINGLY, THE SAME ARE DISMISSED. 15. EXACTLY SIMILAR ISSUE HAS BEEN DECIDED BY THE T RIBUNAL IN A.Y. 2007-08 IN ITA NO. 3807/MUM/2010 DATED 22-01-2014 AGAINST T HE ASSESSEE. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSI DERATION ARE SAME, WE HOLD THAT PROVISIONS OF SECTION 44C OF THE ACT APPL Y TO THE ASSESSEE COMPANY IN RESPECT OF EXPENSES INCURRED AT HEAD OFFICE LEVE L. ACCORDINGLY GROUND NO. 3 OF THE C.O. IS DISMISSED. 15. THE NEXT GRIEVANCE (GROUND NO. 4) IN THE C.O. R ELATES TO THE FAILURE OF DDIT TO APPRECIATE THAT HEAD OFFICE DOES NOT ONLY A PPORTION CERTAIN COSTS TO INDIA BUT ALSO ALLOCATES THE MATCHING COST RECOVERI ES SO THAT IN THE EVENT OF ANY DISALLOWANCE OF HEAD OFFICE COST APPORTIONMENTS THEN THE MATCHING COST RECOVERIES SHOULD ALSO BE EXCLUDED FROM THE TAXABLE INCOME OF THE BRANCH APPLYING THE PRINCIPLE CONTENDED IN ARTICLE 7(1)(A) OF THE INDIA BELGIUM TAX TREATY. 16. WE FIND THAT THIS ISSUE IS ALSO COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 6651/MUM/2011 FOR A. Y. 2008-09 ORDER DATED 31-01-2013 VIDE PARA 10 ON PAGE 11 WHICH READS AS U NDER:- 10. IT HAS BEEN ADMITTED BY THE LEARNED COUNSEL FO R THE ASSESSEE THAT GROUNDS NO. 3 TO 8 WILL RENDER ACADEMIC IN VIEW OF THE FINDINGS GIVEN IN GROUNDS NO. 1 AND 2. CONSEQUENTLY, THESE GROUNDS A RE ALSO TREATED AS DISMISSED. ITA 5723/M/12 & CO 247 /M/13 18 17. THE LD. A.R. FAIRLY CONCEDED THAT THE ABOVE ISS UE IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNAL. RESPECTFULLY FOLLOWING THE SAME, GROUND NO. 4 IS, THEREFORE, DISMISSED. 18. AT THE TIME OF HEARING THE LD. A.R. DID NOT PRE SS GROUNDS 6,7 & 8, THEREFORE, THE SAME ARE DISMISSED IN LIMINE AS NOT PRESSED. 19. IN GROUND NO. 9 THE ASSESSEE IS AGGRIEVED FOR N OT TAKING INTEREST INCOME AS COVERED BY THE PRINCIPLE OF MUTUALITY. 20. THE LD. A.R. FAIRLY CONCEDED THAT THIS GROUND A LSO COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2007-08 AND 2008-09. RESPECTFULLY FOLLOWING THE ORDER DATED 22-1- 2014 AND 31-1-2013 FOR ASSESSMENT YEARS 2007-08 AND 2008-09 OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE DISMISS GROUND NO. 9 TAKEN IN THE C.O. BY THE ASSESSEE. 21. GROUND NO. 10 RELATES TO INTEREST U/S 234B OF T HE ACT. 22. THE DDIT HELD THAT THE ENTIRE INCOME OF THE ASS ESSEE COMPANY IS SUBJECT TO TAX AND ACCORDINGLY LEVIED INTEREST U/S 234B OF THE ASSESSEE. WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE AS SESSEE BY THE ORDER DATED 26- 9-2012 OF THE TRIBUNAL FOR A.Y. 1996-97. THE RELEVA NT OBSERVATIONS OF THE TRIBUNAL GIVEN AT PARA 4.1 TO 4.2 ARE AS UNDER:- 4.1. SECOND GROUND TAKEN BY THE REVENUE IN ITS APP EAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) NOT TO CHARGE INTER EST U/S 234B. 4.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE ISSUE OF CHARGI NG OF INTEREST U/S 234B IN THE PRESENT CASE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF DI RECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) V. NGC NETWORK ASIA LLC [( 2009) 313ITR 187 (BOM.)] IN WHICH IT HAS BEEN HELD THAT WHEN THE DUT Y IS CAST ON THE PAYER TO DEDUCT TAX AT SOURCE, ON FAILURE OF THE PAYER TO DO SO, NO INTEREST CAN BE CHARGED FROM THE PAYEE ASSESSEE U/S 234B. THE SA ME VIEW HAS BEEN ITA 5723/M/12 & CO 247 /M/13 19 REITERATED IN DIT (IT) V. KRUPP UDHE GMBH [(2010) 3 8 DTR (BORN.) 251]. AS THE ASSESSEE BEFORE US IS A NON-RESIDENT, NATURA LLY ANY AMOUNT PAYABLE TO IT WHICH IS CHARGEABLE TO TAX UNDER THE ACT, IS OTHERWISE LIABLE FOR DEDUCTION OF TAX AT SOURCE. IN THAT VIEW OF THE MATTER AND RESPECTFULLY FOLLOWING THE ABOVE PRECEDENTS, WE HOLD THAT NO INT EREST CAN BE CHARGED UNDER SECTIONS 234B AND 234C OF THE ACT. THIS GROUN D IS, THEREFORE, NOT ALLOWED. 23. RESPECTFULLY FOLLOWING THE ABOVE ORDER OF TRIBU NAL IN ASSESSEES OWN CASE, WE ALLOW THIS GROUND IN FAVOUR OF THE ASSESSE E. 24. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED AND THE C.O. FILED BY THE ASSESSEE IS ALLOWED IN PART IN TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH APRIL, 2015. :; 3 6789 / < => ?:0 @ 10-04-2015 7 3 A2 B SD/- SD/- (SANJAY GARG) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER = / J2 MUMBAI ; ?:0 DATED 10-04-2015 1.L0../ RK , SR. PS ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / M4 () / THE CIT(A) CONCERNED,, MUMBAI 4. / M4 / CIT -CONCERNED, MUMBAI 5. P1QA L4L0RS , 5 RS9 , = / J2 / DR, ITAT, MUMBAI E BENCH 6. AUV W2 / GUARD FILE. ' / BY ORDER, P4 L4 //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , = / J2 / ITAT, MUMBAI