No TDS on Expense Reimbursement under Mutual Agreement between Entities

It is debatable to review the appropriateness of the application of the mutuality principle as an instrument of Government policy. The position can easily be understood in a very simple way as referred by Hon’ble Delhi High Court in Yum! Restaurants (Marketing) Private Limited versus Commissioner of Income Tax (ITA No.1433/2008 dated 01-04-2009). The brief facts as summarized is that : Parent company , having license arrangement with foreign companies , used to market ready to eat food items through franchisees, formed a new subsidiary company to take care of publicity on behalf of the franchisees with the proper permission of the state authorities. The parent company was granted permission on the condition that the subsidiary would be a non-profit enterprise and that it would not repatriate its dividends. Thus a new company was formed under tripartite agreement with the condition that all the franchisees will be members and will pay 5% of the gross sales in order to carry on co-operative advertisements to promote all the brands of which parent company was a licensee for the mutual benefit of the franchisees. It was expressly stated that surplus if any left in the accounts will not be distributed but will be carried forward for future use as per the terms of the agreement. A return was filed showing income as nil despite the fact that there was a surplus but as per the views of the company the same was not taxable on the principles of mutuality and on no-profit basis. The case was discussed at the assessment stage and the assessing officer was of the view that despite the fact that the company was being run on the basis of mutuality concept, but contributions received were not in accordance with the terms of agreement and the existence of the company was not to deal with a social/charitable cause. The main object of the said company was to promote business on behalf of members for better sales and consequently to earn more and more profit. An appeal was filed with the commissioner of income tax (appeals). The observations made by commissioner of income tax appeals were that the company was set up with a commercial purpose to take care of activities which are crucial for running a successful business and is linked to the profit on sale of franchisees. Further, the company was in no way created for any social or cultural activity where the idea of profit or trade does not exist. The only restriction as per the agreement was not to deal with the outside body to make it a mutual concern. Thus the CIT (A) was of the view that the underlying purpose was solely for commercial consideration and excess of income over expenditure should be brought to the tax. The above view was confirmed by the Tribunal as well as the High Court of Delhi while dealing with the appeals filed by the aggrieved assessee-company.