2020 Supreme(SC) 322

SUPREME COURT OF INDIA
A.M. Khanwilkar, Dinesh Maheshwari, JJ.
Yum! Restaurants (Marketing) Private Limited – Appellant(s)
Versus
Commissioner of Income Tax, Delhi – Respondent(s)
Civil Appeal No. 2847 of 2010
Decided on : 24-04-2020

IMPORTANT POINTS
Tests for mutuality stated.
Exemption from tax liability is available to companies operating as mutual concerns.

Headnote:

(a) Doctrine of mutuality - Identity of seller and buyer; or vendor and consumer; or contributor and participator marked by oneness - A profit motive cannot be attached to such a venture - Thus excess of income over the expenditure or the "surplus" remaining in the hands of such a venture cannot be regarded as "income" taxable under the Income Tax Act, 1961. (Para 14)

(b) Mutuality - Requires that no person ought to contribute to the common fund without having the entitlement to participate as a beneficiary in the surplus thereof - The class of members should stay intact as the transaction progresses from the stage of contributions to that of returns/surplus - Once a non-member participates in profit/surplus without contributing to common fund, there is no mutuality and such profit/surplus would be amenable to income tax u/s 2(24), Income Tax Act, 1961. (Para 17)

(c) Mutuality - Completeness of identity - Contributors and participators have to be two separate classes, but with oneness or equality in the matter of sharing of surplus/profits - Instantly Pepsi Foods Ltd. contributes to common pool of funds but does not participate in surplus as a beneficiary - No franchisee agreement between Tricon or TRIM and Pepsi Foods Ltd. - Amounts received from Pepsi Foods Ltd. not advertising contributions "from a member of the mutual undertaking" - Assessee company realising money both from members and non-members in course of the same activity carried on by it - Transactions commercial in nature - No mutuality between appellant and Pepsi Foods Ltd. (Para 18, 19, 20, 21, 22, 23)

(d) Mutuality - In a mutual concern contributors to the common fund either acquire a right to participate in the surplus or an entitlement to get back the remaining proportion of their respective contributions - Instantly franchisees do not enjoy any "entitlement" or "right" on the surplus remaining - Further, under tripartite agreement YRIPL may not contribute to common fund and yet be able to derive profits in the form of royalties - Assessee company acted in contravention of the terms of the SIA approval or Government approval. (Para 27, 28, 29)

Facts of the case:

The appellant company Yum! Restaurants (Marketing) Private Limited (for short, "YRMPL" or "assessee company" or "assessee") was incorporated by YRIPL as its fully owned subsidiary after having obtained approval from the Secretariat for Industrial Assistance (for short "SIA") for the purpose of economisation of the cost of advertising and promotion of the franchisees as per their needs. The approval was granted subject to certain conditions as regards the functioning of assessee, whereby it was obligated to operate on a non-profit basis on the principles of mutuality.

In furtherance of the approval, the assessee entered into a Tripartite Operating Agreement (for short, the "Tripartite Agreement") with YRIPL and its franchisees, wherein the assessee company received fixed contributions to the extent of 5 per cent of gross sales for the proper conduct of the advertising, marketing and promotional activities for the mutual benefit of the parent company and the franchisees.

For the Assessment Year under consideration, the assessee filed its returns stating the income to be "Nil" under the pretext of the mutual character of the company. The same was not accepted by the Assessing Officer.

The imposition of liability by the Assessing Officer was upheld by the C.I.T. (A) on the ground of taint of commerciality in the activities undertaken by the assessee company.

The liability was further confirmed by the Tribunal, wherein the essential ingredients of the doctrine of mutuality were found to be missing.

The consistent line of opinion recorded by the aforementioned three forums was further approved in appeal by the High Court.

Finding of the Court:

The assessee company had acted in contravention of the terms of the SIA approval or Government approval.

Result: Appeal disposed of.