Income Tax Appellate Tribunal - Mumbai
Societe Internationale De ... vs Assessee on 10 April, 2015
आयकर अपील
य अ धकरण "E" यायपीठ मब
ंु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND
SHRI SANJAY GARG, JUDICIAL MEMBER
आयकर अपील सं./I.T.A. No.5723 /Mum/2012
( नधा रण वष / Assessment Year 2009-10
Dy. DIT (I T) - 2(1), बनाम/ M/s Societe
Room No. 120, International De
Vs.
Scindia House, Ist floor, Telecommunications
Ballard Estate, Aeronautiques SC
N.M. Road, (S.I.T.A.),
Mumbai - 400 038. AFL House,
Ground floor,
Lok Bharti Complex,
Marol Maroshi Road,
Marol, Andheri (E),
Mumbai -400 059.
थायी ले खा सं . /PAN : AAFCS 2907Q
(अपीलाथ /Appellant) .. ( यथ / Respondent)
या ेप सं/C.O. No. 247/Mum/2013
Arising out of ITA No. 5723/Mum/2012
( नधा रण वष / Assessment Year 2009-10
M/s Societe International बनाम/ Dy. DIT (I T) - 2(1),
De Telecommunications Room No. 120,
Vs.
Aeronautiques SC Scindia House, Ist floor,
(S.I.T.A.), Ballard Estate,
AFL House, N.M. Road,
Ground floor, Mumbai - 400 038.
Lok Bharti Complex, Marol
Maroshi Road,
Marol, Andheri (E),
Mumbai -400 059.
थायी ले खा सं . /PAN : AAFCS 2907Q
Cross Objector .. ( यथ / Respondent)
2 ITA 5723/M/12 & CO 247/M/13
Revenue by Shri Neil Philip
Assessee by : Shri Nitesh Joshi
ु वाई क3 तार5ख / Date of Hearing
सन : 23-03-2015
घोषणा क3 तार5ख /Date of Pronouncement : 10-04-2015
[
आदे श / 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 14-06-2012 for the assessment years 2009-10 and the Cross Objection by the assessee 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 of 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 satisfy the Assessing Officer that the revenue received were matched by the expenses incurred.
(2) The Appellant prays that the order of the Ld. CIT (A) on the above ground(s) be set aside and that of the Assessing Officer restored."
3. Rival contentions have been heard and record perused. Facts in brief are that assessee M/s Societe International De Telecommunications Aeronautiques SC (SI TA) is a company formed in 1949 in Belgium. It has branches over 220 countries. The assessee is claimed to be a cooperative society for the benefit of International Airlines to provide a telecommunication network to all the airlines. The assessee had claimed that it is a mutual benefit society and its 3 ITA 5723/M/12 & CO 247/M/13 income is exempt. Survey u/s 133A was carried out in the premises of the assessee on 29-11-2002. The A.O. has held that the assessee is not a mutual benefit society and its income is not entitled for exemption being an income of mutual concern.By the impugned order, the ld. CIT(A) held that the assessee 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 ITAT in assessee's 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 Tribunal in favour of assessee. Our attention was also invited to the grounds raised 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 dated 14-11-2012 wherein the precise observation with regard to treating the assessee as covered by the principle of mutuality has been decided as under:-
"We have heard the Id DR as well as the ld Sr counsel 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 decided 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 in assessee's own case for the Assessment Year 1996-97 after a detailed discussion of the facts as well as law and the decisions of the Hon'ble Supreme Court as well as the High Court in para 3.4 to 3.24 . The concluding 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 transactions with the members do not convert its non-mutual status to mutual. In the like manner, the otherwise status of mutuality of an organization cannot be destroyed because of a few transaction with the non-
members. What extent of participation by non-members destroys the otherwise mutual status of an organization or what 'extent of participation by members changes the otherwise status of 4 ITA 5723/M/12 & CO 247/M/13 non-mutuality depends on the consideration of the totality of facts and circumstances of each case.
3. 12. Fallowing principles of mutuality can be deduced from the above discussion:-
a. No one can trade with himself and hence there can be no profit from self.
b. When individuals join and form an association and such association sells/provides goods/services or facilities ONLY TO ITS MEMBERS, there can invariably be no profit motive. 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, there 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 participators 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 in point no. b above, apart from entering into transactions with its members in furtherance of its objects, invests its funds or makes deposit in bonk, the return or interest on such investment/deposits will not be covered by the character of mutuality and such an amount will be liable to tax. It is so for the reason that the principle of mutuality will lack as the contributors of such interest income will not be participating in such income. However, mutual character of the organization in respect of transactions with its members will continue and income there from will enjoy exemption.
d. When individuals join and form an association and such association sells/provides goods/services/facilities ONLY TO public at large, that is, NON-MEMBERS, there may or may not be profit motive. When there is profit motive and profits actually follows, such profit is liable to tax. If there is no profit motive but still profit follows, such a profit is also chargeable to tax. If, however there is no profit motive and no profit results, there will not be any tax because of no income and not because of principle of mutuality. Obviously in such a case, the contributors to the profit, being the customers as a class, will be different from the participators in the profit, being the members of the association as a class thereby breaching the principle of mutuality.
e. If, in a case of association of the nature as discussed in point no. d. above, there are by and large transactions with non- members, but there are only a few transactions with members as 5 ITA 5723/M/12 & CO 247/M/13 well, the nature of the organization as non-mutual, will remain as such. Whereas profits from transactions with non-members will be liable to tax, profit from transactions with the members will continue to enjoy exemption.
When the organization provides facilities and services 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 members.
(ii) When the 'object' of the organization is 'not to earn profit' but profit emerges from transactions with members and non-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 case on the touchstone of the brooder principles of mutuality as figured out by us in preceding para. It is observed that the assessee extended facilities to Airport Authorities. United Nation. IFC. UNESCO and Equant customers. It is evident from page 27 para 74 of the 'Statement of facts' filed by the assessee before the 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 shown in its Income and Expenditure account. The fact that the assessee 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 certain countries outside India, in order to maximize such economies of scale. Under those arrangements, the costs incurred by each party 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 with such non- members. The assessee's contention is that it was simply recovering costs from its members and non-members for rendering services and there was no profit motive. The total of cost recoveries from government, international organizations and Equant customers, constituting non-members as a group, is 0.07% of the total cost recoveries. It shows that the assessee provided services to its members at 99.93% of its total operations. This fact 6 ITA 5723/M/12 & CO 247/M/13 evidences that non-members availed the facilities provided 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 the assessee was set up with a profit motive. We have perused Articles of association of the assessee, a copy of which is placed at page 116 onwards of the paper book. Objects of the assessee are contained in Article 3. Main object of the assessee as per clause a) of Article 3 is: 'to foster all communication and information processing, matters directly or indirectly connected with the transmission and processing of all categories of information required in the operation of the air transport industry and to study the problems relating to them with the aim of promoting in all countries safe and regular air transport'. Other Objects of the assessee are on the same lines. There is no reference to any "profit motive" in such objects. It has been consistently claimed by the assessee that it has not earned any profit from its transactions and the consideration 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-members availing the facilities extended by the assessee are very insignificant 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 the learned CIT(A) cannot be faulted with insofar as it accepts the rule of mutuality qua the transactions with members and denies the same qua the transactions with non-members.
3.18. The next argument of the learned Departmental Representative in support of his contention that the mutuality should be rejected in entirety was with reference to Articles 20 and 50 of the Articles of association of the assessee. It was submitted that since the retiring or resigning members are not entitled to participate in the reserves to some extent, 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 judgment in the case of Wankaner Jain Social, Welfare Society (supra). In this case the Hon'ble Madras High Court considered the facts in which the object of the society was to create and cultivate the 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 bona fide need. The rules and regulations of the society made it compulsory for 7 ITA 5723/M/12 & CO 247/M/13 every member to participate in the scheme of deposit. The Assessing Officer denied the mutuality on the ground that every depositor was not necessarily borrower and therefore, the interest paid by the borrowers and distributed amongst the non-borrower members dented the mutuality. The Hon'ble Madras High Court upheld this principle by holding that since the interest income was available for being distributed amongst al/ the members including those who had not borrowed moneys, the identity between the contributors and participators was lost and hence the 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 the same persons on an individual level or a class level. The Hon 'ble 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 members. In this case, the Hon'ble jurisdictional High Court recognized 'class of member')' as participators as well as contributors for mutuality·, instead of the 'individual' members. It has been held in this case that the fact that only some members from those who contributed may participate in the surplus, is irrelevant as long as the class is same.
3.20. The learned Departmental Representative also relied on the judgment of the Hon'ble Supreme court in the case of Kumbakonam Mutual Benefit Fund Ltd. (supra) to contend that the principle of mutuality fails if the persons who contribute 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 deposits schemes of the assessee or to obtain loans of securities. These recurring deposits constituted the main source of funds of the assessee for advancing loans. Out of the interest realized by the assessee on the loans, interest on recurring deposit was paid and 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 upheld 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 received recurring deposits and made advances to certain members. The surplus was distributed amongst members according to their shareholding 8 ITA 5723/M/12 & CO 247/M/13 after making a provision for reserves etc. The shareholders who were entitled to participate in the surplus need not 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. It was not necessary for a shareholder either to take loan or to make a recurring deposit. Thus the contributors to the funds were different as 0 group from the participators, being, the shareholders of the club as a group.
3.22. In view of the fact that Articles 20 and 50 debar the retiring or resigning members from participating in the reserves available cannot be considered as a factor eclipsing the principle of mutuality. It is so far the reason that the persons who are entitled to share and participate in the reserves of the society continue to remain the same as a group or class of persons. The mere fact that a person at the time of resigna1T6n or retirement is not entitled to share in the reserves of the organization, would not damage the mutuality so long as the persons who are entitled to share such reserves continue to be the members as a class.
3.23. Be that as it may, it is observed that this fact has been considered by the Tribunal while deciding the principle of mutuality in relation to assessment years 1974-75 and 1975-76. The Tribunal has elaborately reproduced and discussed these two Articles in its order and thereafter recorded a positive conclusion granting the status of mutual organization to the assessee. Same is true in respect of the creation of reserves as well. 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 assessment years 1974-75 and 1975-76. In view of the conclusion arrived at by the Tribunal in earlier years holding that the mutuality is not disturbed by reason of Article 20 and 50 of the assessee or the creation of reserves, we do not deem it necessary to dive deep into the arguments of the Id. DR with a view to bring out any decision contrary to what has already been taken by the Tribunal in earlier years on the same facts and circumstances.
3.24. We, therefore, sum up our conclusion on ground No. 1 taken by the Revenue in its appeal by holding that the assessee is covered by the principle of mutuality to the extent of its transactions with the members. Income from transactions with non-members is outside the purview of mutuality."
9 ITA 5723/M/12 & CO 247/M/13
4. Following the earlier order of this Tribunal, we hold that the assessee is covered by the principle of mutuality to the extent of its transaction with the members only and the income from the transaction of non members is outside the purview of 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 well 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 under consideration are exactly same, we do not find any infirmity in the order of the ld. CIT(A) for treating the assessee as covered by principle of mutuality.
8. In the C.O., the assessee is aggrieved for treating the reimbursement cost as income.
9. The ld. A.R. placed on record order of the Tribunal in ITA No. 572/Mum/10 for A.Y. 2006-07 dated 14-11-2012 wherein 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 assessee as well as the ld. DR and considered the relevant material on record. It is fairly admitted by both the parties that the issue raised in the Cross Objection has also been considered and decided by this Tribunal in assessee's own case for the Assessment Year 1996-97. However, the Id Sr counsel for the assessee has submitted that the Tribunal has made certain observations/remarks in para 5.5 of the order for the Assessment Year 1996-97 at page 77 of the order regarding the correctness of the income divulged from the accounts 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 accounts 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 income 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 referred the notes of accounts in the audit report and submitted that the accounts of the
10 ITA 5723/M/12 & CO 247/M/13 Head Office are audited by some other auditors and the audit report of the other auditor has been relied upon by the auditor 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 Year under consideration to those of Assessment Year 1996-97 and therefore, the Tribunal. after taking note of the fact that it was found that both sides of the assessee's income and expenditure are matching 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 regarding 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 perused the relevant material on record. There can be no dispute about the fact that any amount received by way of reimbursement, not containing any element of profit, is not liable to tax. This principle has been laid down by the Hon'ble jurisdictional High Court in CIT v. Siemens Aktiongesellschaft (2009) 177 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 the 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 earning any income liable to tax from such reimbursement. We agree with the learned AR on this principle that the reimbursement 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 applicable in the facts and circumstances of the instant case. It is observed from the statements of Shri S. Gopalakrishnan and Mr. Andrew C1eak recorded at the time of survey that the basis of allocation of costs to different countries by the HO was not known. It was admitted that the HO allocates a proportion of its general administrative 11 ITA 5723/M/12 & CO 247/M/13 and financing cost to other branches to exactly match the total cost incurred in each country in each month. It was also admitted that there was no verification of the expenses allocated by the HO because the basis of charge was known to HO alone and the details of such computation were not provided to the Indian branch. On a question about the recording of revenues, it was admitted that the entry was passed on the receipt of intimation from HO and how such revenues are determined, was not known. In response to question nos. 12 and 13, Shri Gopalakrishnan 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 Indio. The learned AR has invited our attention towards its letter doted 5.02.2005 addressed to the Id. CIT(A) about the basis of allocation. From this letter it is crystal clear that the assessee stated before the learned OT(A) that "the global cost recoveries made by the SIT A HO are allocated to all of the SITA branches worldwide so as to match the costs borne by those branches. Thus, the overall effect of allocating head office costs to the SITA branches worldwide is to increase both the branch costs and also the corresponding 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 is concerned only with the tax revenues relating to Indian operations. Unless it is properly established that 01/ the expenses claimed by the Indian branch represents the assessee's shore in a proper manner, it cannot be accepted that the allocation was made on some rational basis. Here is a case in which both the sides of the assessee's Income and expenditure 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 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 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 year or any earlier or later year, the learned AR failed to point out any such amount. We have perused the Income and expenditure account and balance sheet of the assessee. It is observed that both the sides of the assessee's Income and expenditure are matching paisa to paisa and there is no under-recovery or over-recovery shown as an asset or a liability in its balance sheet. Further. when we consider the fact that the accounts of the assessee were maintained at the HO level, there remains nothing to doubt the 12 ITA 5723/M/12 & CO 247/M/13 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 allocation of expenses but also that of the 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 absence of any new facts or material, we do not find any substance in the contention of the ld Sr counsel for the assessee regarding the marks of the Tribunal in the earlier year. Moreover, the same does not effect the 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 wherein this issue has been decided against of the assessee at para 7 to 9 at page No. 10 to 13 of the order. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assessee's own case we hold that reimbursement of cost was not income of assessee.
11. The ground raised with regard to estimating the profit of the assessee company at 5% of gross amount recovered from non-members is covered against the assessee by the order of the Tribunal in ITA No. 6651/Mum/11 for A.Y. 2008-09 dated 31-01-2013. Precise observation 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 decided against the assessee in assessee's own case for assessment year 1996-97 and in the assessment year 2006-07, decided by the Tribunal, vide order dated 14th November 2012. The relevant findings given by the Tribunal in relation to grounds No.1 and 2 of the cross objection are as under:-
"7 Having considered the rival submissions and the relevant material on record, we find that the facts regarding the issue raised by the assesseed in the CO are identical.
13 ITA 5723/M/12 & CO 247/M/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 perused the relevant material on record. There can be no dispute about the fact that any amount received by way of reimbursement, not containing any element of profit, is not liable to tax. This Principles has been laid down by the Hon'ble jurisdictional 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 when a particular amount of expenditure is incurred and the 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 earning any income liable to tax from such reimbursement. We agree with the learned A.R. on this Principles that the reimbursement 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 applicable in the facts and circumstances of the instant case. It is observed from the statements of Shri S. Gopalakrishnan and Mr. Andrew Cleak recorded at the time of survey that the basis of allocation of costs to different countries by the HO was not known. It was admitted that the HO allocates a proportion of its general administrative and financing cost to other branches to exactly match the total cost incurred in each country in each month. It was also admitted that there was no verification of the expenses allocated by the HO because the basis of charge was known to HO alone and the details of such computation were not provided to the Indian branch. On a question about the recording of revenues, it was admitted that the entry was passed on the receipt of intimation from HO and how such revenues are determined, was not known.
In response to question nos. 12 and 13, Shri Gopalakrishnan 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 allocation. From 14 ITA 5723/M/12 & CO 247/M/13 this letter it is crystal clear that the assessee stated before the learned CIT( A) that "the global cost recoveries made by the SITA HO are allocated to all of the SITA branches worldwide so as to match the costs borne by those branches. Thus, the overall effect of allocating head office costs to the SITA branches worldwide is to increase both the branch costs and also the corresponding 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 is 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 Telecommunications Aeronautiques that the allocation was made on some rational basis. Here is a case in which both the sides of the assessee's Income and expenditure 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 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 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 year or any earlier or later year, the learned AR failed to point out any such amount. We have perused the Income and expenditure account and balance sheet of the assessee. It is observed that both the sides of the assessee's Income and expenditure are matching paisa to paisa and there is no under- recovery or over-recovery shown as an asset or a liability in its balance sheet. Further, when we consider the fact that 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 allocation of expenses but also that of the 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 there was no profit element in it, is not open for verification.
7.2 When the Tribunal has decided this issue after considering rival contention and relevant facts, then in the absence of any new facts or material, we do not find any substance in the 15 ITA 5723/M/12 & CO 247/M/13 contention of the ld Sr counsel for the assessee regarding the remarks of the Tribunal in the earlier year. Moreover, the same does not effect the findings of the Tribunal on this issue.
7.3 As regards ground no.2 to 9 of the CO are concerned, 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, deduction for such HO expenses has to be made in terms of section 44C. In the light of this section, the learned AR contended 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 gross 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 expenditure incurred by the assessee outside India including expenditure in respect of rent, rates, repairs etc. It is only the allocation of general and administrative expenses 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 equally unknown at India level. This brings us to a situation 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 Rule 10 of Income-tax Rules, 1962 comes to the rescue of the Revenue for determination of income in the case of non-residents. It is this very rule which has been --~.-". voked by the Assessing Officer and also applied by e learned CIT( A) in estimating the income of the assessee. In our considered opinion the learned CIT(A) was more than justified in estimating the income at 5% of the gross receipts from non- members. These grounds taken by the assessee are not 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 assessee; accordingly, the same are dismissed. "
16 ITA 5723/M/12 & CO 247/M/13
9. Thus, respectfully following the earlier year's 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 objection stand dismissed."
12. As the facts and circumstances during the year was same, respectfully following the order of Tribunal in assessee's own case, 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 applicability of provisions of section 44C of the Act to the assessee company in respect of certain expenses incurred at head office level which may not fall within the definition of "head office expenditure" as defined in section 44C of the 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 concerned, 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 ;s not known, deduction for such HO expenses has to be made in terms of section 44C. In the light of this section, the learned AR contended that only a small portion of the HO expenses ought to have 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 executive and general administrative expenditure incurred by the assessee outside India including expenditure in respect of rent, rates, repairs etc. It is only the allocation of general and administrative expenses 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 expenses is not known, but the basis of allocation of income is equally unknown at Indio level. This brings us to a situation where neither the income side nor the 17 ITA 5723/M/12 & CO 247/M/13 expenditure side of the assessee's Income and expenditure account is fully capable of verification. It is in such circumstances that Rule 10 of Income-tax Rules, 1962 comes to the rescue of the Revenue for determination of income in the case of non-residents. 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 assessee. In our considered opinion the learned CIT(A) was more than justified in estimating the income at 5% of the gross receipts from 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 Tribunal in A.Y. 2007-08 in ITA No. 3807/Mum/2010 dated 22-01-2014 against the assessee. As the facts and circumstances during the year under consideration are same, we hold that provisions of section 44C of the Act apply to the assessee company in respect of expenses incurred at Head Office level. Accordingly ground No. 3 of the C.O. is dismissed.
15. The next grievance (ground No. 4) in the C.O. relates to the failure of DDIT to appreciate that head office does not only apportion certain costs to India but also allocates the matching cost recoveries 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 assessee's 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 under:-
"10. It has been admitted by the learned counsel for 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 are also treated as dismissed."
18 ITA 5723/M/12 & CO 247/M/13
17. The ld. A.R. fairly conceded that the above issue 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 press grounds 6,7 & 8, therefore, the same are dismissed in limine as not pressed.
19. In ground No. 9 the assessee is aggrieved for not taking interest income as covered by the principle of mutuality.
20. The ld. A.R. fairly conceded that this ground also covered against the assessee by the order of the Tribunal in assessee's 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 assessee's 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 the Act.
22. The DDIT held that the entire income of the assessee 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 assessee by the order dated 26- 9-2012 of the Tribunal for A.Y. 1996-97. The relevant 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 appeal is against the direction of the learned CIT(A) not to charge interest u/s 234B.
4.2. Having heard the rival submissions and perused the relevant material on record we find that the issue of charging 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 Director of income-tax (International Taxation) v. NGC Network Asia LLC [(2009) 313ITR 187 (Bom.)] in which it has been held that when the duty 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 same view has been 19 ITA 5723/M/12 & CO 247/M/13 reiterated in DIT (IT) v. Krupp UDHE GmbH [(2010) 38 DTR (Born.) 251]. As the assessee before us is a non-resident, naturally 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 interest can be charged under sections 234B and 234C of the Act. This ground is, therefore, not allowed."
23. Respectfully following the above order of Tribunal in assessee's own case, we allow this ground in favour of the assessee.
24. In the result, appeal of the Revenue is dismissed and the C.O. filed by the assessee is allowed in part in terms indicated above.
Order pronounced in the open court on 10th April, 2015.
आदे श क3 घोषणा खल ु े <यायालय म> ?दनांकः 10-04-2015 को क3 गई ।
Sd/- sd/-
(SANJAY GARG) (R.C. SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मुंबई Mumbai; ?दनांक Dated 10-04-2015
व.Lन.स./ RK , Sr. PS
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयुMत(अपील) / The CIT(A) - Concerned,, Mumbai
4. आयकर आयM ु त / CIT --Concerned, Mumbai
5. Pवभागीय LतLनRध, आयकर अपील5य अRधकरण, मुंबई / DR, ITAT, Mumbai E Bench
6. गाडV फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस स याPपत Lत //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai