REPORTABLE
\nIN THE SUPREME COURT OF INDIA
\nCIVIL APPELLATE JURISDICTION
\nCIVIL APPEAL NO. 2847 OF 2010
\nYum! Restaurants (Marketing)
\nPrivate Limited …Appellant(s)
\nVersus
\nCommissioner of Income Tax, Delhi …Respondent(s)
\nJ U D G M E N T
\nA.M. Khanwilkar, J.
\n1. The moot question involved in the present appeal bears
\nupon the applicability of the doctrine of mutuality qua the
\nassessee company, a fully owned subsidiary of Yum! Restaurants
\n(India) Pvt. Ltd. (for short, \u201cYRIPL\u201d), formerly known as Tricon
\nRestaurants India Pvt. Ltd., incorporated for undertaking the
\nactivities relating to Advertising, Marketing and Promotion (for
\nshort, \u201cAMP activities\u201d) for and on behalf of YRIPL and its
\nfranchisees.
\n2
\n2. This appeal assails the final judgment and order dated
\n1.4.2009 passed by the High Court of Delhi at New Delhi (for
\nshort, \u201cthe High Court\u201d) in I.T.A. No. 1433 of 2008 wherein the
\nquestion of taxability of Rs. 44,44,002\/(
\nRupees forty four lakhs
\nforty four thousand two only), being the excess of income over
\nexpenditure for the Assessment Year 200102,
\nwas settled in
\nfavour of the Revenue and against the assessee, thereby
\nconfirming the orders of the Income Tax Appellate Tribunal (for
\nshort, \u201cthe Tribunal\u201d), Commissioner of Income Tax (Appeals) [for
\nshort, the \u201cCIT(A)\u201d] and the Assessing Officer. The preceding
\nforums, without any exception, have returned consistent verdicts
\nrefusing to acknowledge the assessee company as a mutual
\nconcern and denying any exemption from taxability.
\n3. The appellant company Yum! Restaurants (Marketing)
\nPrivate Limited (for short, \u201cYRMPL\u201d or \u201cassessee company\u201d or
\n\u201cassessee\u201d) was incorporated by YRIPL as its fully owned
\nsubsidiary after having obtained approval from the Secretariat for
\nIndustrial Assistance (for short \u201cSIA\u201d) for the purpose of
\neconomisation of the cost of advertising and promotion of the
\nfranchisees as per their needs. The approval was granted subject
\n3
\nto certain conditions as regards the functioning of assessee,
\nwhereby it was obligated to operate on a nonprofit
\nbasis on the
\nprinciples of mutuality. The relevant clauses of the approval
\ngranted by the SIA for the aforementioned operations read thus:
\n\u201c3. It is noted that the broad framework within which
\nsuch subsidiary shall be managed and operated in India
\nis as follows:
\nThe
\nfranchises and Tricon India will both make
\ncontribution of a fixed percentage of their respective
\nrevenues (net of taxes) to the proposed New Company
\non regular basis;
\nThe
\nproposed New Company would be a nonprofit
\nenterprise governed by the principles of mutuality. No
\npart of the contributions or other income shall enure
\nto the benefit of any individual contributor;
\nThe
\ncontributors will be optimally used by the
\nproposed new Company to economise the cost of
\nadvertising and promotion cater to the specific needs
\nof franchisees to concentrate on restaurant operations
\nand management;
\nThe
\nmanagement of the proposed New Company
\nshall vest with Tricon India and application of
\ncontributions will be decided by Tricon India in
\nconsultation with the franchisee;
\nxxx xxx xxx
\nThe
\napproval is subject to the condition that the step
\ndown subsidiary would be a nonprofit
\nenterprise and
\nwould not be allowed to repatriate dividends.\u201d
\n4. In furtherance of the approval, the assessee entered into a
\nTripartite Operating Agreement (for short, the \u201cTripartite
\nAgreement\u201d) with YRIPL and its franchisees, wherein the assessee
\ncompany received fixed contributions to the extent of 5 per cent
\n4
\nof gross sales for the proper conduct of the advertising,
\nmarketing and promotional activities for the mutual benefit of the
\nparent company and the franchisees. The terms of the Tripartite
\nAgreement, to the extent relevant for the consideration of the
\npresent case, are produced thus:
\n\u201c2.2 TRIM will establish and operate Brand Funds in
\nrespect of each Brand for the purpose of allocating and
\nusing the Advertising Contribution received from
\nfranchisee and other franchisee of Tricon operating
\nRestaurants under the Brands. TRIM will allocate the
\nadvertising contribution received from the Franchisees
\nincluding Franchisee for each Restaurant to the
\nrespective Brand funds established for that brand. It is
\nagreed between the Parties that the advertising
\ncontribution paid into a brand fund will be used for the
\nAMP Activities relating to that brand.
\n3. FRANCHISEE ADVERTISING CONTRIBUTIONS
\n3.1 As and from the Effect Date, Franchisee will pay
\nthe Advertising Contribution of 5% of Revenues for a
\nparticular month into the Bank account of the Brand
\nFund established by TRIM by the 10th day of the
\nfollowing month. Details of the bank account, of each
\nBrand Fund set up by TRIM will notified to Franchisee by
\nTRIM from time to time. Notwithstanding the aforesaid,
\nthe executive committee of any Brand (constituted under
\nArticle 7 of this Agreement) may, by a three fourth
\nmajority, which shall be binding on all franchisees of
\nTricon including the Franchisee, require the franchisee to
\npay the advertising Contribution in advance. For the
\navoidance of doubt it is clarified and agreed that while
\nrecommending advance payment of Advertising
\nContribution the chairman will not have a casting vote.
\nFranchise will spend an additional 1% of Revenues, in the
\nmanner directed by Tricon and\/or TRIM in writing from
\ntime to time, on such local store marketing, advertising,
\npromotional and research expenditure proposed by
\nFranchisee and approved in advance by Tricon and\/or
\nTRIM during the relevant Accounting Period, in
\n5
\naccordance with the requirements and guidelines set out
\nin the Manuals, provided that if Franchisee fails to spend
\nthe full amount as directed by Tricon and\/or TRIM
\nfranchisee will pay the unspent amount to TRIM within
\nthe period specified in a written demand from TRIM. Upon
\nreceipt of the unspent amount TRIM will spend the
\namount on regional and\/or national advertising,
\npromotions or research expenditure conducted by TRIM
\nin its discretion…….\u201d
\nxxx xxx xxx
\n4.1 Tricon may at the request of TRIM, but
\nsubject to Tricon\u2019s sole and absolute discretion pay to
\nTRIM any such amount(s) as it may deem appropriate
\nto support the AMP [sic] activities during any
\nAccounting Period for the avoidance of doubt, it is
\nclarified and agreed between the Parties that Tricon
\nshall have no obligation to pay any such amounts if it
\nchooses not to do so.
\nxxx xxx xxx
\n8.4 In the event there is any surplus left over in any
\nof the Brand Funds at the end of an accounting period,
\nTRIM shall be entitled to retain the surplus to be spent on
\nAMP activities during the following accounting period.
\nAlternatively, TRIM may, subject to the approval of its
\nBoard of Directors refund the surplus amounts to the
\nfranchisees including Franchisee in the same proportion
\nas the actual advertising contribution made by each
\nfranchisee including franchisee in that accounting period.
\nOn the other hand, if there is a deficit in any of the brand
\nfunds at the end of an accounting period, the deficit will
\nbe carried forward to the next accounting period and be
\nmet out of the advertising contribution paid by the
\nfranchisees including franchisee for that accounting
\nperiod. For the avoidance of doubt, it is agreed between
\nthe parties that Tricon and\/or TRIM shall not be obliged
\nto fund the deficit.
\n8.5 It is clearly understood and agreed between the
\nparties that the only objective of TRIM is to coordinate the
\nmarketing activities of the brands including the mutual
\nbenefit of the franchisees including the Franchisee. It is
\nenvisaged that no profits will be earned and no dividends
\nwill be declared by TRIM.\u201d
\n6
\n(emphasis supplied)
\n5. For the Assessment Year under consideration, the assessee
\nfiled its returns stating the income to be \u201cNil\u201d under the pretext of
\nthe mutual character of the company. The same was not
\naccepted by the Assessing Officer, who observed thus:
\n\u201cVI.7.3 As per the SIA letter dated 05.10.1998 Assessee
\nCompany along with the franchisees were to contribute a
\nfix percentage of its revenue to YRMPL. However as per
\nclause 4.1 of Tripartite operating agreement submitted by
\nYRMPL, the assessee company had its sole absolute
\ndiscretion to pay to YRMPL any amount as it may deem
\nappropriate and that YRIPL shall have no obligation to
\npay any such amounts if it chooses not to do so. This
\nclearly shows that YRIPL was under no legal obligation to
\npay any amount of contribution as per its own version
\nreflected from tripartite agreement.\u201d
\n6. The imposition of liability by the Assessing Officer was
\nupheld by the C.I.T. (A) on the ground of taint of commerciality in
\nthe activities undertaken by the assessee company, wherein it
\nwas observed thus:
\n\u201c1.14 ….The AMP activity is quite a critical component of
\nrunning a successful business venture, it is intrinsically
\nlinked to sales and profit of the franchisees the
\ncontributors. Accordingly it cannot be said that such
\nactivity is immune from the taint of commerciality. Unlike
\nin the cases of a club, the appellant Co. is not existing for
\nany social inter course nor is it for cultural activities
\nwhere the idea of profit or trade does not exist. What is
\nessential is that there should not be any dealing with
\noutside body which results in a benefit which promotes
\nsome commercial\/business venture. There should not be
\nany profit earning motive in any transaction directly or
\nindirectly. In fact in the appellant\u2019s case the essence of
\nmutuality also appears to be missing in that there is no
\ninstance or scope of say trading between persons
\n7
\nassociating together. Thus though the form taken up to
\nconduct its revenue activity undoubtedly resemble a
\nmutual concern but the contributions made on the other
\nhand are undeniably for business considerations. In my
\nopinion, taking an overall view of the intent and motive of
\nthe appellant company to form a \u2018mutual concern\u2019 it can
\nbe concluded that the underlying purpose was solely for
\ncommercial consideration. Therefore in view of the above
\nas demonstrated by the appellant Co. the excess of
\nreceipts over the expenditure i.e. the surplus in my
\nopinion would be income liable to tax\u2026.\u201d
\n7. The liability was further confirmed by the Tribunal, wherein
\nthe essential ingredients of the doctrine of mutuality were found
\nto be missing. It observed thus:
\n\u201c11. …. Firstly the Government order sanctioning setting
\nup of the wholly owned subsidiary prescribes that the
\napproval is subject to the condition that such subsidiary
\nwould be a nonprofit
\nenterprise and is also not entitled
\nto repatriate dividends. The main object of the assessee
\ncompany reveals that it is to carry out advertising,
\nmarketing and promotion for brands owned by its parent
\ncompany. The main plank of the assessee\u2019s arguments is
\nthat the principles of mutuality will apply and hence the
\nincome cannot be taxed. Time and again various courts
\nhave held that where there is complete identity between
\nthe contributors and the participators or the
\nbeneficiaries, only then such principles can be applied.
\nHowever, in the present case it is seen that apart
\nfrom contributions is also received from M\/s Pepsi
\nFoods Ltd. and YRIPL. Pepsi Foods Ltd. is neither a
\nfranchisee nor a beneficiary. Similarly some
\ncontribution is also received from YRIPL which YRIPL
\nis not under any obligation to pay. Thus it can be said
\nthat essential requirement that of the contributors to
\nthe common fund are either to participate in the
\nsurplus or they are beneficiaries of the contribution is
\nmissing. Through the common AMP activities no
\nbenefit accrues to Pepsi Food Ltd. or YRIPL.
\nAccordingly the principles of mutuality cannot be
\napplied. It is a different facts that the assessee was
\nestablished with the object not to make profit but it is
\nalso a fact that there is a surplus in the hands of the
\n8
\nassessee which arose due to contribution from certain
\npersons who were neither the benficiaries nor have right
\nto receive the surplus….\u201d
\n(emphasis supplied)
\n8. The consistent line of opinion recorded by the
\naforementioned three forums was further approved in appeal by
\nthe High Court vide impugned judgment, by observing thus:
\n\u201c8. ….The principle of mutuality as enunciated by the
\nCourts in various cases is applicable to a situation where
\nthe income of the mutual concern is the contributions
\nreceived from its contributors. The expenses incurred by
\nthe mutual concerns are incurred from such
\ncontributions and hence on the principle that no man can
\ndo business with himself, the excess of income over
\nexpenditure is not amenable to tax. However, in the
\npresent case the authorities below have returned a
\nfinding of fact that the fund as contributors such as Pepsi
\nFood Ltd which do not benefit from the APM Activities.
\nMoreover, the principle of mutuality is applicable to those
\nentities whose activities are not tinged with commercial
\npurpose. As a matter of fact in the instant case the parent
\ncompany i.e., YRIPL which has also contributed to the
\nbrand fund is under the agreement under no obligation to
\ndo so. The contributions of YRIPL are at its own
\ndiscretion. Thus, looking at the facts obtaining in the
\npresent case, it is quite clear that the principle of
\nmutuality would not be applicable to the instant case….\u201d
\n9. On cogitating over the rival submissions, we reckon that the
\nfollowing questions of law would arise for our consideration in the
\npresent case:
\n(i) Whether the assessee company would qualify as a
\nmutual concern in the eyes of law, thereby exempting
\nsubject transactions from tax liability?
\n9
\n(ii) Whether the excess of income over expenditure in the
\nhands of the assessee company is not taxable?
\n10. The appellant\/assessee has contended that the sole
\nobjective of the assessee company was to carry on the earmarked
\nactivities on a noprofit
\nbasis and to operate strictly for the
\nbenefit of the contributors to the mutual concern. It has further
\nbeen contended that the assessee company levies no charge on
\nthe franchisees for carrying out the operations. While assailing
\nthe observations made in the impugned judgment, holding that
\nPepsi Foods Ltd. and YRIPL are not beneficiaries of the concern,
\nthe assessee company has urged that YRIPL is the parent
\ncompany of the assessee and earns fixed percentage from the
\nfranchisees by way of royalty. Therefore, it benefits directly from
\nenhanced sales as increased sales would translate into increased
\nroyalties. A similar argument has been advanced as regards Pepsi
\nFoods Ltd. It is stated that under a marketing agreement, the
\nfranchisees are bound to serve Pepsi drinks at their outlets and
\nthus, an increase in the sales at KFC and Pizza Hut outlets as a
\nresult of AMP activities would lead to a corresponding increase in
\nthe sales of Pepsi. To add weight to this argument, it has been
\nbrought to our notice that Pepsi was also advertised by the
\n10
\nfranchisees in their advertising and promotional material, along
\nwith Pizza Hut and KFC, and copy of the said material has been
\nplaced on record.
\n11. As regards the doctrine of mutuality, it is urged by the
\nassessee company that the doctrine merely requires an identity
\nbetween the contributors and beneficiaries and it does not
\ncontemplate that each member should contribute to the common
\nfund or that the benefits must be derived by the beneficiaries in
\nthe same manner or to the same extent. Reliance has been placed
\nby the appellant upon reported decisions to draw a parallel
\nbetween the functioning of the assessee company and clubs to
\nsupport the presence of mutuality.
\n12. The Revenue\/respondent has countered the submissions
\nmade by the assessee company by submitting that the moment a
\nnonmember
\njoins the common pool of funds created for the
\nbenefit of the contributors, the taint of commerciality begins and
\nmutuality ceases to exist in the eyes of law. It has been
\nsubmitted that the assessee company operated in contravention
\nof the SIA approval as contributions were received from Pepsi,
\ndespite it not being a member of the brand fund. To buttress this
\n11
\nsubmission, it is urged that once the basic purpose of benefiting
\nthe actual contributors is lost, mutuality stands wiped out.
\n13. We have heard Mr. Balbir Singh, learned senior counsel for
\nthe appellant and Mr. V. Shekhar, learned senior counsel for the
\nrespondent.
\nRe: Question (i):
\n14. The doctrine of mutuality traces its origin from the basic
\nprinciple that a man cannot engage into a business with himself.
\nFor that reason, it is deemed in law that if the identity of the
\nseller and the buyer; or the vendor and the consumer; or the
\ncontributor and the participator is marked by oneness, then a
\nprofit motive cannot be attached to such a venture. Thus, for the
\nlack of a profit motive, the excess of income over the expenditure
\nor the \u201csurplus\u201d remaining in the hands of such a venture cannot
\nbe regarded as \u201cincome\u201d taxable under the Income Tax Act, 1961
\n(for short, \u201cthe 1961 Act\u201d). What is taxable under the 1961 Act is
\n\u201cincome\u201d or \u201cprofits\u201d or \u201cgains\u201d as they accrue to a person in his
\ndealings with other party or parties that do not share the same
\nidentity with the assessee. For income, there is an underlying
\n12
\nexchange of a commercial nature between two different entities.
\nIn Commissioner of Income Tax, Bihar v. Bankipur Club
\nLtd.1, this court observed on the nature of liability under the
\n1961 Act thus:
\n\u201c6. Under the Income Tax Act (hereinafter referred to
\nas \u201cthe Act\u201d) what is taxed is, the “income, profits or gains
\nearned or “arising”, “accruing” to a person”. The question
\nis whether in the case of members\u2019 clubs a
\nspecies of
\nmutual undertaking in
\nrendering various services to its
\nmembers which result in a surplus, the club can be said
\nto “have earned income or profits” In order to answer the
\nquestion, it is necessary to have a background of the law
\nrelating to “mutual trading” or “mutual undertaking” and
\na “members club”.\u201d
\n15. The law regarding the tenets of mutuality is no more res
\nintegra. It has been settled in a catena of judicial
\npronouncements and academic works across multiple
\njurisdictions. In Bangalore Club v. Commissioner of Income
\nTax & Anr.2, this Court authoritatively quoted one of the earliest
\njudicial pronouncements in New York Life Insurance Co. v.
\nStyles (Surveyor of Taxes)3 thus:
\n\u201cWhen a number of individuals agree to contribute funds
\nfor a common purpose. . . and stipulate that their
\ncontributions, so far as not required for that purpose,
\nshall be repaid to them. I cannot conceive why they
\nshould be regarded as traders, or why contributions
\nreturned to them should be regarded as profits.\u201d
\n1 (1997) 5 SCC 394
\n2 (2013) 5 SCC 509
\n3 (1889) 2 TC 460
\n13
\nThe proposition of law is restated in Bankipur Club (supra) and
\nBangalore Club (supra) by placing reliance upon the following
\nextract from Simon\u2019s Taxes4:
\n\u201c\u2026 it is settled law that if the persons carrying on a trade
\ndo so in such a way that they and the customers are the
\nsame persons, no profits or gains are yielded by the trade
\nfor tax purposes and therefore no assessment in respect
\nof the trade can be made. Any surplus resulting from this
\nform of trading represents only the extent to which the
\ncontributions of the participators have proved to be in
\nexcess of requirements. Such a surplus is regarded as
\ntheir own money and returnable to them. In order that
\nthis exempting element of mutuality should exist it is
\nessential that the profits should be capable of coming
\nback at some time and in some form to the persons to
\nwhom the goods were sold or the services rendered…”
\n16. In order to undertake the examination of mutuality, we
\ngainfully advert to The English and Scottish Joint Cooperative
\nWholesale Society Ltd. v. Commissioner of
\nAgricultural IncomeTax,
\nAssam5, which has been quoted with
\napproval by this Court in Commissioner of Income Tax,
\nBombay City v. Royal Western India Turf Club Ltd.6 and
\nBangalore Club (supra). The aforestated stream of judicial
\npronouncements expound three conditions\/tests to prove the
\nexistence of mutuality:
\n4 Simon\u2019s Taxes, Volume B, 3rd Edition, Pgs. 159, 167
\n5 AIR 1948 PC 142
\n6 AIR 1954 SC 85
\n14
\n(i) Identity of the contributors to the fund and the
\nrecipients from the fund;
\n(ii) Treatment of the company, though incorporated as a
\nmere entity for the convenience of the members and policy
\nholders, in other words, as an instrument obedient to their
\nmandate, and;
\n(iii) Impossibility that contributors should derive profits
\nfrom contributions made by themselves to a fund which
\ncould only be expended or returned to themselves.
\nWhereas the legal position on what amounts to a mutual concern
\nstands fairly settled, the factual determination of the same on a
\ncase to case basis poses a complex issue that requires deeper
\nexamination. Such examination ought to be conducted in the
\nlight of the tests enunciated above.
\nCommon Identity
\n17. The first element involves the test of commonality of identity
\nbetween the members or participators in the mutual concern and
\nthe beneficiaries thereof. Succinctly put, this limb of the threepronged
\ntest requires that no person ought to contribute to the
\n15
\ncommon fund without having the entitlement to participate as a
\nbeneficiary in the surplus thereof. Conversely, no person ought
\nto participate as a beneficiary without first having been a
\ncontributor or a member of the class of contributors to the
\ncommon fund. Common identity, as it occurs in the present
\ncontext, signifies that the class of members should stay intact as
\nthe transaction progresses from the stage of contributions to that
\nof returns\/surplus. It must manifest uniformity in the class of
\nparticipants in the transaction. The moment such a transaction
\nopens itself to nonmembers,
\neither in the contribution or the
\nsurplus, the uniformity of identity is impaired and the
\ntransaction assumes the taint of a commercial transaction. The
\nemphasis on the words member and nonmember
\nis of import
\nbecause the doctrine of mutuality does not prohibit the inclusion
\nor exclusion of new members. What is prohibited is the infusion
\nof a participant in the transaction who does not become a
\n\u2018member\u2019 of the common fund, at par with other members, and
\nyet participates either in the contribution or surplus without
\nsubjecting itself to mutual rights and obligations. The principle of
\ncommon identity prohibits any onedimensional
\nalteration in the
\nnature of participation in the mutual fund as the transaction
\n16
\nfructifies. Any such alteration would lead to the nonuniform
\nparticipation of an external element or entity in the transaction,
\nthereby opening the scope for a manifest or latent profitbased
\ndealing in the transaction with parties outside the closed circuit
\nof members. It would be amenable to income tax as per Section
\n2(24) of the 1961 Act.
\nCompleteness of Identity
\n18. Coterminous with the requirement of common identity, as
\ndiscussed above, the law also contemplates a completeness of
\nidentity between the contributors and participators. The theory of
\ncompleteness of identity presupposes the contributors and
\nparticipators to be two separate classes, but there is oneness or
\nequality in the matter of sharing of surplus\/profits. This is to
\nensure that there is no interference of any alien commercial
\nentity in the transaction. With the interference of any alien entity,
\nthe idea of conducting business with oneself is defeated and any
\nprofits or gains accruing therefrom become subject to tax
\nliability. This proposition of law is succinctly predicated in
\nBritish Tax Encyclopaedia7, which reads thus:
\n7 British Tax Encyclopedia (I), 1962 Edition, Pgs. 1200 and 1201
\n17
\n\u201c\u2026For this doctrine to apply it is essential that all the
\ncontributors to the common fund are entitled to
\nparticipate in the surplus and that all the participators in
\nthe surplus are contributors, so that there is complete
\nidentity between contributors and participators. This
\nmeans identity as a class, so that at any given moment of
\ntime the persons who are contributing are identical with
\nthe persons entitled to participate; it does not matter that
\nthe class may be diminished by persons going out of the
\nscheme or increased by others coming in\u201d
\nIt is pertinent to note that in order to determine the breach in
\nmutuality, the court is well within its powers to go beyond the
\nperiphery of the concern and undertake an examination akin to
\nthe lifting of the veil in order to discern the real nature thereof.
\n19. In the present case, it is indisputable that Pepsi Foods Ltd.
\nis a contributor to the common pool of funds. However, it does
\nnot participate in the surplus as a beneficiary for at least two
\nreasonsfirst,
\nPepsi is not a member of the purported mutual
\nconcern as the Tripartite Agreement as well as the terms of SIA
\napproval permit only \u2018franchisees\u2019 to become members of the
\nmutual concern. Notably, Pepsi Foods Ltd. is not a franchisee
\nand thus, it cannot participate in the surplus. Second, Pepsi does
\nnot enjoy any right of participation in the surplus or any right to
\nreceive back the surplus which are mandatory ingredients to
\nsustain the principle of mutuality.
\n18
\n20. We find it noteworthy that the Tripartite Agreement requires
\nthe assessee company to constitute a separate Brand Fund for
\neach franchisee as stated in clause 2.2 of the said agreement,
\nwhich reads thus:
\n\u201c2.2 TRIM will establish and operate Brand Funds in
\nrespect of each Brand, for the purpose of allocating and
\nusing the Advertising Contribution received from
\nfranchisee and other franchisee of Tricon operating
\nRestaurants under the Brands TRIM will allocate the
\nadvertising contribution received from the franchisees
\nincluding Franchisee for each Restaurant to the Parties
\nthat the Advertising Contribution paid into a Brand Fund
\nwill be used for the AMP Activities relating to that Brand.\u201d
\n(emphasis supplied)
\nSince no Brand Fund, as contemplated above, has been
\nconstituted for Pepsi Foods Ltd., it does not become a part of the
\npurported Tripartite mutual arrangement so as to qualify as a
\nbeneficiary of the mutual operations. The definition clause of the
\nTripartite Agreement adds weight to this finding. \u201cAdvertising
\nContribution\u201d, as defined in the definition clause means,
\n\u201cthe advertising contributions which Franchisee has
\nagreed to pay to Tricon pursuant to [sic] the Franchisee
\nAgreements.\u201d
\nFurthermore, \u201cFranchise Agreements\u201d, as defined in the
\ndefinition clause, means agreements executed between Tricon
\nand Franchisee. As a corollary, what follows is that for any
\namount received by the assessee company to be treated as an
\n19
\nadvertising contribution, it must be paid by a franchisee, that too
\nin the aftermath of a prior franchisee agreement to that effect. In
\nthe light of the prevailing relationship, there is no such
\nfranchisee agreement between Tricon or TRIM and Pepsi Foods
\nLtd. and therefore, the amounts received from Pepsi Foods Ltd.
\ncannot be viewed as advertising contributions \u201cfrom a member of
\nthe mutual undertaking\u201d as such.
\n21. In the present case, therefore, the assessee company is
\nrealising money both from the members as well as nonmembers
\nin the course of the same activity carried on by it. This court, in
\nRoyal Western India Turf Club Ltd. (supra) has categorically
\nheld such operations to be antithetical to mutuality. We deem it
\napposite to take note of the dictum in Bankipur Club (supra),
\nwherein this principle has been restated thus:
\n\u201c22. …if the object of the assessee company claiming to
\nbe a \u201cmutual concern\u201d or \u201cclub\u201d, is to carry on a
\nparticular business and the money is realised both from
\nthe members and from nonmembers,
\nfor the same
\nconsideration by giving the same or similar facilities to all
\nalike in respect of the one and the same business carried
\non by it, the dealings as a whole disclose the same profitearning
\nmotive and are alike tainted with commerciality…
\nand the resultant surplus is profitincome
\nliable to tax\u2026\u201d
\n22. The contention of the assessee company that Pepsi Foods
\nLtd., in fact, does benefit from the mutual operations by virtue of
\n20
\nits exclusive contracts with the franchisees is tenuous, as the
\nvery basis of mutuality is missing as far as Pepsi Foods Ltd. is
\nconcerned, as discussed hitherto. Even if any remote or indirect
\nbenefit is being reaped by Pepsi Foods Ltd., the same cannot be
\nsaid to be in lieu of it being a member of the purported mutual
\nconcern and therefore, cannot be used to fill the missing links in
\nthe chain of mutuality. Concededly, the surplus of a mutual
\noperation is meant to be utilised by the members of the mutual
\nconcern as members enjoy a proximate connection with the
\nmutual operation. Nonmembers,
\nincluding Pepsi Foods Ltd.,
\nstand on a different footing and have no proximate connection
\nwith the affairs of the mutual concern. The exclusive contract
\nbetween the franchisees and Pepsi Foods Ltd. stands on an
\nindependent footing and YRIPL as well as the assessee company
\nare not responsible for implementation of this contract.
\nResultantly, the first limb of the threepronged
\ntest stands
\nsevered.
\nNonprofiteering
\nand Obedience to Mandate
\n21
\n23. Whereas the doctrine of mutuality stands debunked with
\nthe failure of the first test, let us, nonetheless, examine the other
\ntwo tests in the present factual scenario. Indubitably, the receipt
\nof money from an outside entity without affording it the right to
\nhave a share in the surplus does not only subjugate the first test
\nof common identity, but also contravenes the other two
\nconditions for the existence of mutuality i.e. impossibility of
\nprofits and obedience to the mandate. The mandate of the
\nassessee company was laid down in the SIA approval wherein the
\ntwin conditions of mutuality and nonprofiteering
\nwere
\nenvisioned as the sine qua non for the functioning of the assessee
\ncompany. The contributions made by Pepsi Foods Ltd. tainted the
\noperations of the assessee company with commerciality and
\nconcomitantly contravened the prerequisites
\nof mutuality and
\nnonprofiteering.
\n24. The mutuality and nonprofiteering
\ncharacter of a concern
\nare to be determined in light of its actual working structure and
\nthe factum of corporation or incorporation or the form in which it
\nis clothed is immaterial. It is, therefore, imperative to examine
\nthe actual functional framework of the assessee company in light
\n22
\nof the status of YRIPL (parent company) visavis
\nother
\nmembers\/franchisees. As per the terms of the SIA approval,
\nYRIPL and franchisees were equally obligated to make
\ncontribution of a fixed percentage to the assessee company. This
\nrequirement was incorporated as a precondition
\nfor the grant of
\npermission to operate as a mutual concern. Clause 3 of the
\napproval letter reads thus:
\n\u201cThe franchises and Tricon Indian will both make
\ncontribution of a fixed percentage of their respective
\nrevenues (net of taxes) to the proposed New Company on
\nregular basis:\u201d
\nHowever, drifting from this mandate, the Tripartite Agreement
\nmade it discretionary upon YRIPL to contribute to the common
\npool, thereby putting it at a higher pedestal than the franchisees.
\nClause 4.1 of the Tripartite Agreement reads thus:
\n\u201c4.1 Tricon may at the request of TRIM, but subject
\nto Tricon sole and absolute discretion pay to TRIM
\nany such amount(s) as it may deem appropriate to
\nsupport the VVIP activities during the Accounting Period
\nfor the avoidance of doubt, it is clarified and agreed
\nbetween the Parties that Tricon shall have no obligation
\nto pay any such amounts if it chooses not to do so.\u201d
\n(emphasis supplied)
\nThus, clause 4.1 is not in confirmity with the terms of approval.
\nFurthermore, it is noteworthy that the management of the
\nassessee company was under full and absolute control of its
\n23
\nparent company YRIPL. Be it also noted that the participation of
\nthe franchisees in the management of the assessee company was
\nagain subject to approval by YRIPL, which falls within its sole
\ndiscretion. Clause 7.1 of the Tripartite Agreement reads thus:
\n\u201c7.1 The management and operations of TRIM will be
\ncarried out by its Board of Directors in accordance with
\nthe Articles of Association of TRIM, the terms of which
\nshall be read as a part of this Agreement. The Board of
\nDirectors of TRIM will be nominated by Tricon from time
\nto time in accordance with the Articles of Association of
\nTRIM. The Board of Directors of TRIM shall consist of a
\nminimum number of five directors. Out of the five
\ndirectors Tricon may, in its absolute and sole
\ndiscretion, nominate one representative each of two
\nfranchisees (to be selected by Tricon on a rational
\nbasis) to be appointed as directors on the Board of
\nDirectors of TRIM such nominees to hold office for a
\nperiod of one year from the date of their appointment. In
\nthe event the representative of the Franchisee is
\nnominated to the Board of Directors of TRIM. Franchisee
\nagrees and undertakes to cause such representative to (i)
\naccept such appointment as and when the same is made;
\nand (ii) to resign from the post of Director on the expiry of
\none year from the date of appointment or earlier, if so
\nrequested by Tricon.\u201d
\n(emphasis supplied)
\n25. The net effect of the aforequoted clauses is to render the
\npreconditions
\nfor the grant of approval, as otiose. It also
\nbecomes amply clear that YRIPL and the franchisees stand on
\ntwo substantially different footings. For, the franchisees are
\nobligated to contribute a fixed percentage for the conduct of AMP
\nactivities whereas YRIPL is under no such obligation in utter
\nviolation of the terms of SIA approval. Moreover, even upon
\n24
\nrequest for the grant of funds by the assessee company, YRIPL is
\nnot bound to accede to the request and enjoys a \u201csole and
\nabsolute\u201d discretion to decide against such request. That
\nmembers of a financial concern exercise mutual control over its
\nmanagement without the scope of prejudicial exercise of power by
\none class of members over the others is the quintessence for the
\nexistence of a mutual concern. The word \u201cmutual\u201d offers guidance
\nto this effect. Literally understood, the word \u201cmutual\u201d points
\ntowards reciprocity and a mutual arrangement is one in which
\nthe members\/parties have reciprocal rights or understanding or
\narrangement. An arrangement wherein one member is subjected
\nto the absolute discretion of another, in such a manner that the
\nentire liability may fall upon one whereas benefits are reaped by
\nall, is antithesis to the mutual character in the eyes of law.
\n26. The contention advanced by the appellant that it is not
\nmandatory for every member of the mutual concern to contribute
\nto the common pool fails to advance the case of the appellant. It
\nis no doubt true that every member of the mutual concern might
\nnot be required to contribute to the common pool at all times.
\nHowever, it does not mean that one member cannot be made to
\n25
\ncontribute under any pretext whatsoever. For, that would
\namount to the grant of an overriding position to a member in the
\nmutual agreement, extending upto even overruling the requests
\nfor contribution from other members for mutual necessity. It is
\nthis allpervasive
\noverriding position of one member over the
\nothers that negates the effect of mutuality. There is a fine line of
\ndistinction between absence of obligation and presence of
\noverriding discretion. In the present case, YRIPL enjoys the latter
\nat the detriment of the franchisees of the purported undertaking,
\nboth in matters of contribution and management. In a mutual
\nconcern, it is no doubt true that an obligation to pay may or may
\nnot be there, but in the same breath, it is equally true that an
\noverriding discretion of one member over others cannot be
\nsustained, in order to preserve the real essence of mutuality
\nwherein members contribute for the mutual benefit of all and not
\nof one at the cost of others.
\n27. More importantly, an examination of the judicial decisions
\nrelied upon by the parties brings out the settled legal position
\nthat in order to qualify as a mutual concern, the contributors to
\nthe common fund either acquire a right to participate in the
\n26
\nsurplus or an entitlement to get back the remaining proportion of
\ntheir respective contributions. In the present scheme of things,
\nclause 8.4 provides that,
\n\u201c8.4 In the event there is any surplus left over in any of
\nthe Brand Funds at the end of an Accounting Period.
\nTRIM shall be entitled to retain the surplus to be spent on
\nAMP activities during the following Accounting Period.
\nAlternatively, TRIM may, subject to the approval of
\nits Board of Directors, refund the surplus amounts to
\nthe franchisees including Franchisee in the same
\nproportion as the actual Advertising Contribution made
\nby each franchisee including Franchisee in that
\nAccounting Period.\u201d
\n(emphasis supplied)
\n28. Contrary to the abovestated legal position, clause 8.4 makes
\nit clear that the franchisees do not enjoy any \u201centitlement\u201d or
\n\u201cright\u201d on the surplus remaining after the operations have been
\ncarried out for a given assessment year. The clause provides that
\nthe assessee company may refund the surplus subject to the
\napproval of its Board of Directors. It implies that the
\nfranchisees\/contributors cannot claim a refund of their
\nremaining amount as a matter of right. Be it noted that the
\nraison d\u2019etre behind the refund of surplus to the contributors or
\nmandatory utilisation of the same in the subsequent assessment
\nyear is to reduce their burden of contribution in the next year
\nproportionate to the surplus remaining from the previous year.
\n27
\nThus, the fulfilment of this condition becomes essential. In the
\npresent case, even if any surplus is remaining in a given
\nassessment year, it is unlikely to reduce the liability of the
\nfranchisees in the following year as their liability to the extent of
\n5 per cent is fixed and nonnegotiable,
\nirrespective of whether
\nany funds are surplus in the previous year. The only entity that
\ncould derive any benefit from the surplus funds is YRIPL, i.e. the
\nparent company. This is antithetical to the third test of
\nmutuality.
\n29. `Be that as it may, the dispensation predicated in the
\nTripartite Agreement may entail in a situation where YRIPL would
\nnot contribute even a single penny to the common pool and yet
\nbe able to derive profits in the form of royalties out of the
\npurported mutual operations, created from the fixed 5 per cent
\ncontribution made by the franchisees. This would be nothing
\nshort of derivation of gains\/profits out of inputs supplied by
\nothers. That cannot be countenanced as being violative of the
\nbasic essence of mutuality. The doctrine of mutuality, in
\nprinciple, entails that there should not be any profit earning
\nmotive, either directly or indirectly. The third test of mutuality,
\nquoted above, requires that the purported mutual operations
\n28
\nmust be marked by an impossibility of profits and this crucial
\ntest is also not fulfilled in the present case.
\n30. Furthermore, the exemption granted to a mutual concern is
\npremised on the assumption that the concern is being run for the
\nmutual benefit of the contributors and the contributions made by
\nthe members ought to be directed in that direction. Contrary to
\nthis fundamental tenet, clause 8.1 of the Tripartite Agreement
\nrelieves the assessee company from any specific obligation of
\nspending the amounts received by way of contributions for the
\nbenefit of the contributors. It explicates that the assessee
\ncompany does not hold such amount under any implied trust for
\nthe franchisees, and reads thus:
\n\u201c8.1 …. Notwithstanding the foregoing, any amount paid
\nby Franchisee to TRIM will not be required to be spent for
\nthe specific benefit, either direct or indirect, of Franchisee
\nor the Business and no express or implied trust will be
\ncreated in respect of such amount. Additionally,
\nFranchisee will not have any claim or action against
\nTricon and\/or TRIM in connection with the level of
\nsuccess of any such advertising, marketing, promotion,
\nresearch or test.\u201d
\n31. A priori, it must follow that the assessee company had acted
\nin contravention of the terms of approval. Notably, the SIA
\napproval or Government approval was not only a binding
\ndocument but also a conditional document with a defined set of
\n29
\npreconditions for the functioning of the assessee company as a
\nmutual concern. The SIA approval categorically reads that the
\ngrant of approval is subject to the terms and conditions specified
\ntherein and any contravention thereof would be infraction of the
\nmandate of the government approval.
\n32. The appellant had urged that no fixed percentage of
\ncontribution could be imputed upon YRIPL as it does not operate
\nany restaurant directly and thus, the actual volume of sales
\ncannot be determined. At the very outset, this argument holds no
\nwater as YRIPL receives fixed percentage of royalty from the
\nfranchisees on the sales. We say so because if the franchisees
\ncould be obligated with a fixed percentage of contribution, 5 per
\ncent in the present case, it is unfathomable as to why the same
\nobligation ought not to apply to YRIPL.
\n33. Be it noted that the text of the Tripartite Agreement points
\ntowards the true intent of the formation of the assessee company
\nas a step down subsidiary. For, clause C predicates thus:
\n\u201cC. TRIM has been established as a wholly owned
\nstep down subsidiary Tricon to manage of the retail
\nrestaurant business, the advertising medial and
\npromotion at regional level and national level of KFC.
\nPizza Hut and other brands currently owned or
\nacquired in future by Tricon and on its parents and of
\nits associate company.\u201d
\n30
\nIn the absence of any ambiguity, the terms of a contract are to be
\nunderstood in their ordinary and natural sense, thus revealing
\nthe true intent of the contracting parties. The aforequoted clause
\nclearly points towards the fact that the assessee company was
\nformed to manage business on behalf of the holding company. In
\nits true form, it was not contemplated as a nonbusiness
\nconcern
\nbecause operations integral to the functioning of a business were
\nentrusted to it.
\n34. The doctrine of mutuality bestows a special status to qualify
\nfor exemption from tax liability. It is a settled proposition of law
\nthat exemptions are to be put to strict interpretation. The
\nappellant having failed to fulfil the stipulations and to prove the
\nexistence of mutuality, the question of extending exemption from
\ntax liability to the appellant, that too at the cost of public
\nexchequer, does not arise. Taking any other view would entail in
\nstretching the limits of construction. In The Law of Taxation by
\nThomas M. Cooley8, the rule regarding strict construction of
\nexemptions is succinctly summarised thus:
\n\u201c672. Strict constructionRule
\nstated. An intention
\non the part of the legislature to grant an exemption from
\n8 Thomas M. Cooley, The Law of Taxation, 4th Edition, Volume 2, Pg. 671
\n31
\nthe taxing power of the state will never be implied from
\nlanguage which will admit of any other reasonable
\nconstruction. Such an intention must be expressed in
\nclear and unmistakable terms, or must appear by
\nnecessary implication from the language used, for it is a
\nwellsettled
\nprinciple that, when a special privilege or
\nexemption is claimed under a statute, charter or act of
\nincorporation, it is to be construed strictly against the
\nproperty owner and in favour of the public. This principle
\napplies with peculiar force to a claim of exemption from
\ntaxation. Exemptions are never presumed, the burden is
\non a claimant to establish clearly his right to exemption,
\nand an alleged grant of exemption will be strictly
\nconstrued and cannot be made out by inference or
\nimplication but must be beyond reasonable doubt. …….
\nMoreover, if an exemption is found to exist, it must not be
\nenlarged by construction, since the reasonable
\npresumption is that the state has granted in express
\nterms all it intended to grant at all, and that unless the
\nprivilege is limited to the very terms of the statute the
\nfavour would be extended beyond what was meant\u2026\u201d
\n35. The assessee company has relied upon reported decisions to
\nestablish a parallel between the operations carried out by itself
\nand clubs. Upon closer scrutiny, however, we find that the
\nauthorities cited by the appellant do not advance its case because
\nof the structural differences between the operations carried out
\nby the purported mutual concern (assessee company) and clubs.
\nIn the case of clubs, the operations are exempted from taxability
\nbecause of the underlying notion that they operate for the
\ncommon benefit of the members wishing to enter into a social
\nexchange with no commercial intent. Further, all the members of
\nthe club not only have a common identity in the concern but also
\n32
\nstand on an equal footing in terms of their rights and liabilities
\ntowards the club or the mutual undertaking. Such clubs are a
\nmeans of social intercourse, as rightly observed by CIT (A) in the
\npresent case, and are not formed for the facilitation of any
\ncommercial activity. On the contrary, the purported mutual
\nconcern in the present case undertakes a commercial venture
\nwherein contributions are accepted both from the members as
\nwell as nonmembers,
\nas discussed earlier. Moreover, one
\nmember is vested with a myriad set of powers to control the
\nfunctioning and interests of other members (franchisees), even to
\ntheir detriment. Such an assimilation cannot be termed as a case
\nof ordinary social intercourse devoid of commerciality.
\nRe: question No. (ii):
\n36. Once it is conclusively determined that the assessee
\ncompany had not operated as a mutual concern, there would be
\nno question of extending exemption from tax liability. Be that as
\nit may, to support an alternative claim for exemption, the
\nassessee company took a plea in the written submissions that it
\nwas acting under a Trust for the contributors, and was under an
\noverriding obligation to spend the amounts received for
\n33
\nadvertising, marketing and promotional activities. It is urged that
\nonce the incoming amount is earmarked for an obligation, it does
\nnot become \u201cincome\u201d in the hands of the assessee as no occasion
\nfor the application of such income arises.
\n37. In the written submissions, the assessee company has
\ncontended thus:
\n\u201cThe Hon\u2019ble High Court further erred in not adjudicating
\nthe specific ground raised by the Appellant that the
\ncontributions received by the Appellant cannot be said to
\nbe its income because the Appellant merely holds them as
\na trustee and also under an overriding obligation to spend
\nsuch contributions received for AMP activities.\u201d
\n38. The law on what amounts to a case of diversion before
\naccrual and what amounts to application post accrual is well
\nsettled and can be summarised by making reference to Dalmia
\nCement Ltd., Rajasthan v. Commissioner of Income Tax, New
\nDelhi9, wherein the following extract of The Commissioner of
\nIncome Tax, Bombay City II v. Sitaldas Tirathdas10 was
\nquoted with approval:
\n\u201c16\u2026 In our opinion, the true test is whether the amount
\nsought to be deducted, in truth, never reached the
\nassessee as his income. Obligations, no doubt, there are
\nin every case, but it is the nature of the obligation which
\nis the decisive fact. There is a difference between an
\namount which a person is obliged to apply out of his
\n9 (1999) 4 SCC 124
\n10 AIR 1961 SC 728
\n34
\nincome and an amount which by the nature of the
\nobligation cannot be said to be a part of the income of the
\nassessee. Whereby the obligation income is diverted
\nbefore it reaches the assessee, it is deductible; but where
\nthe income is required to be applied to discharge an
\nobligation after such income reaches the assessee, the
\nsame consequence, in law, does not follow. It is the first
\nkind of payment which can truly be excused and not the
\nsecond. The second payment is merely an obligation to
\npay another portion of one’s own income, which has been
\nreceived and is since applied. The first is a case in which
\nthe income never reaches the assessee, who even if he
\nwere to collect it, does so, not as part of his income, but
\nfor and on behalf of the person to whom it is payable…\u201d
\nFurthermore, in Associated Power Co. Ltd. v. Commissioner of
\nIncome Tax11, this Court again observed thus:
\n\u201c13. The application of the doctrine of diversion of income
\nby reason of an overriding
\ntitle is quite inapposite. The
\ndoctrine applies when, by reason of an overriding
\ntitle or
\nobligation, income is diverted and never reaches the
\nperson in whose hands it is sought to be assessed…\u201d
\nSimilarly, in The Commissioner of Income Tax, Kerala,
\nErnakulam v. The Travancore Sugars & Chemical Ltd.12, this
\nCourt restated thus:
\n\u201c22\u2026 It is thus clear that where by the obligation income
\nis diverted before it reaches the assessee, it is deductible.
\nBut, where the income is required to be applied to
\ndischarge an obligation after such income reaches the
\nassessee it is merely a case of application of income to
\nsatisfy an obligation of payment and is therefore not
\ndeductible.\u201d
\n39. The CIT (A), while rejecting this ground, relied upon
\nSitaldas Tirathdas (supra), and observed thus:
\n11 (1996) 7 SCC 221
\n12 (1973) 3 SCC 274
\n35
\n\u201c… Where an assessee applies an income to discharge an
\nobligation after the income reaches the hands of the
\nassessee, it would be an application of income and this
\nwould resulting taxation of such income in the hands of
\nthe appellant.\u201d
\n40. We note that the same ground was also pressed in appeal
\nbefore the Tribunal which finds mention in the Tribunal\u2019s order
\ndated 31.01.2008 in the following words:
\n\u201c(b) In failing to consider and appreciate that the amount
\nreceived by the appellant from the franchisees towards
\nadvertising contributions are diverted at source by
\noverriding title for being spent on advertisement ..\u201d
\nHowever, the Tribunal did not record any observation addressing
\nthis ground in the abovesaid order. It has been brought to our
\nnotice that the assessee company has made an application under
\nsection 254(2) of the 1961 Act for rectification of the Tribunal\u2019s
\norder citing an error apparent on the face of the record. The said
\napplication is stated to be pending.
\n41. Considering the fact that the question of diversion by
\noverriding title was neither framed nor agitated in the appeal
\nmemo before the High Court or before this Court (except a brief
\nmention in the written submissions), coupled with the fact that
\nneither the Tribunal nor the High Court has dealt with that plea
\nand that the rectification application raising that ground is still
\nundecided and stated to be pending before the Tribunal, we deem
\n36
\nit appropriate to leave it open to the appellant to pursue the
\nrectification application, if so advised. We may not be understood
\nto have expressed any opinion either way as regards the
\ntenability of the said application or otherwise.
\n42. In view of the aforestated terms, the questions posed for our
\nconsideration stand answered against the appellant (assessee
\ncompany) and in favour of the Revenue and the appeal stands
\ndisposed of upholding the impugned judgment with liberty to the
\nappellant to pursue remedy of rectification, as per law. There
\nshall be no order as to costs. Pending interlocutory applications,
\nif any, shall also stand disposed of.
\n…………………………….J.
\n(A.M. Khanwilkar)
\n…………………………….J.
\n(Dinesh Maheshwari)
\nNew Delhi;
\nApril 24, 2020.<\/p>\n","protected":false},"excerpt":{"rendered":"
On cogitating over the rival submissions, we reckon that the following questions of law would arise for our consideration in the present case: (i) Whether the assessee company would qualify as a mutual concern in the eyes of law, thereby exempting subject transactions from tax liability? (ii) Whether the excess of income over expenditure in the hands of the assessee company is not taxable?<\/p>\n