Full Judgment Text
* THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on : 01.04.2009
ITA No. 1433/2008
YUM! RESTAURANTS (MARKETING) PRIVATE
LIMITED ..... Appellant
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash
Kumar, Advocate
For the Respondent : Ms Prem Lata Bansal, Mr Mohan Prasad Gupta &
Mr Sanjeev Rajpal, Advocates
CORAM :-
HON'BLE MR JUSTICE VIKRAMAJIT SEN
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported Yes
in the Digest ?
RAJIV SHAKDHER, J
1. This is an appeal preferred by the assessee-company under
Section 260A of the Income Tax Act, 1961 (hereinafter referred to as
the „Act‟) against the judgment dated 31.01.2008 passed by the Income
Tax Appellate Tribunal (hereinafter referred to as the „Tribunal‟) in ITA
No. 3235/Del/2005 pertaining to assessment year 2001-02.
2. The only issue which arose in this case is with respect to the
taxability of Rs 44,44,002/- being excess amount of income over
expenditure. The said surplus had arisen on account of advertisement
ITA No. 1433/2008 Page 1 of 10
contributions received from the holding company of the assessee-
company which remained unexpended.
2.1 The broad facts with respect to the above case have been
delineated in the connected appeal entitled Yum! Restaurant (India) Pvt
Ltd vs CIT; being ITA No. 192/2009, which was heard alongwith the
present appeal. Judgment was reserved in both the appeals.
3. Briefly, the parent company, that is, Yum! Restaurant (India) Pvt
Ltd (in short „YRIPL‟) formerly known as Tricon Restaurants India Pvt
Ltd was incorporated on 17.03.1994. The YRIPL had a licence
arrangement with Kentucky Fried Chicken International Holdings, Inc.
(in short „KFC‟) and Pizza Hut International LLC (in short „PHILLC‟).
The YRIPL sought permission from the Government of India, Ministry of
Industry, Department of Industrial Policy and Promotion, Secretariat
for Industrial Assistance (SIA), Foreign Collaboration, for setting up a
wholly owned step-down subsidiary to manage retail restaurant
business, for advertising and promotion at local store level, regional
level and national level. By a letter dated 05.10.1998, SIA granted
approval to YRIPL to set up a step-down wholly owned subsidiary on
the basis of a broad framework indicated by YRIPL. The broad
framework being that the proposed new subsidiary company would be a
non-profit enterprise which would be governed by the principles of
mutuality. The wholly owned subsidiary, as indicated by YRIPL, was
being set up to carry out and economise the cost of advertising and
promotion by catering to the specific needs of its franchisees in order
to enable them to concentrate on restaurant operations and
management. The approval was granted on the condition that the
subsidiary would be a non-profit enterprise and that it would not
repatriate its dividends out of the country.
ITA No. 1433/2008 Page 2 of 10
3.1 Upon receiving the requisite permission the assessee-company
was incorporated on 08.06.1999.
3.2 In September, 2000 the YRIPL, the assessee-company, as well as,
the franchisees entered into tripartite agreements. Under the
agreement the assessee-company received contributions from the
franchisees as well as the franchisees of the YRIPL to the extent of 5%
of the gross sales in order to carry on co-operative advertising. The
agreement also envisaged that the purpose of incorporating the
assessee-company was really to carry the marketing activities of each
of the brands of which YRIPL was a licensee for the mutual benefit of
the franchisees. The entire activity of the assessee-company was to be
carried out on no-profit basis and that the assessee-company was
obliged not to repatriate any dividends. The broad purpose of the
agreement is best encapsulated in the following clauses:-
“2.2 TRIM will establish and operate Brand Funds in
respect of each brand for the purpose of allocating and
using the advertising contribution received from
franchisee and other franchisee of Tricon operating
Restaurants under the Brands. TRIM will allocate the
advertising contribution received from the franchisees
including franchisee for each restaurant to the
respective Brand Funds established for that brand. It is
agreed between the parties that the advertising
contribution paid into a brand fund will be used for the
AMP activities relating to that brand.
3.1 As and from the Effective Date, franchisee will
pay the advertising contribution of 5% of Revenue for a
particular month into the bank account of the brand
th
fund established by TRIM by the 10 day of the
following month. Details of the bank account of each
brand fund set up by TRIM will be notified to franchisee
by TRIM from time to time. Notwithstanding the
aforesaid the executive committee of any Brand
(constituted under Article 7 of this Agreement) may, by
a three fourth majority, which shall be binding on all
franchisees of Tricon including the franchisee, require
the franchisee to pay the advertising contribution in
advance. For the avoidance of doubt it is clarified and
agreed that while recommending advance payment of
advertising contribution the chairman will not have a
casting vote.
ITA No. 1433/2008 Page 3 of 10
Franchise will spend an additional 1% of Revenues, in
the manner directed by Tricon and/or TRIM in writing
from time to time, on such local store marketing,
advertising, promotional and research expenditure
proposed by franchisee and approved in advance by
Tricon and/or TRIM during the relevant accounting
period, in accordance with the requirements and
guidelines set out in the manuals, provided that if
franchisee fails to spend the full amount as directed by
Tricon and/or TRIM franchisee will pay the unspent
amount to TRIM within the period specified in a written
demand from TRIM. Upon receipt of the unspent
amount TRIM will spend the amount on regional and/or
national advertising, promotions or research
expenditure conducted by TRIM in its discretion.......”
4.1 Tricon may at the request of TRIM, but subject
to Tricon’s sole and absolute discretion pay to
TRIM any such amount(s) as it may deem
appropriate to support the AMP activities during
any accounting period. For the avoidance of
doubt, it is clarified and agreed between the
parties that Tricon shall have no obligation to pay
any such amounts if it chooses not to do so.
xxxx
xxxx
8.4 In the event there is any surplus left over in any of
the Brand Funds at the end of an accounting period,
TRIM shall be entitled to retain the surplus to be spent
on AMP activities during the following accounting
period. Alternatively, TRIM may, subject to the
approval of its Board of Directors refund the surplus
amounts to the franchisees including Franchisee in the
same proportion as the actual advertising contribution
made by each franchisee including franchisee in that
accounting period.
On the other hand, if there is a deficit in any of the
brand funds at the end of an accounting period, the
deficit will be carried forward to the next accounting
period and be met out of the advertising contribution
paid by the franchisees including franchisee for that
accounting period. For the avoidance of doubt, it is
agreed between the parties that Tricon and/or TRIM
shall not be obliged to fund the deficit.
8.5 It is clearly understood and agreed between the
parties that the only objective of TRIM is to coordinate
the marketing activities of the brands including the
mutual benefit of the franchisees including the
franchisee. It is envisaged that no profits will be
earned and no dividends will be declared by TRIM.”
ITA No. 1433/2008 Page 4 of 10
3.3 It is in this background that on 31.10.2001 the assessee-company
filed its return for assessment year 2001-02. On 27.08.2002 the
assessee‟s return was processed under Section 143(1) of the Act. On
24.10.2002 the assessee‟s case was picked up for scrutiny and a notice
under Section 143(2) of the Act was issued to the assessee-company.
During the course of scrutiny, queries were raised with the
representatives of the assessee-company; whereupon it was revealed
that the assessee-company had an excess income over expenditure
amounting to Rs 44,44,002/-. However, the gross total income had been
declared as „nil‟. The income and expenditure account as recorded in
the order of the Assessing Officer read as follows:-
“INCOME
Advertising contribution from franchises,
Holding company and key associates 26469546
EXPENDITURE
Advertising, Marketing and Promotional 21256032
Expenditure
Preliminary expenses 454992
Administrative and other expenses 190272
21901296
Excess of expenditure carried forward from the (124248)
Previous year
Excess of income/ (Expenditure) over 4444002
(expenditure)/income carried forwarded to the
Balance sheet (included under current
Liabilities)”
3.4 With the return the assessee-company had appended the notes
broadly indicating that it was operating on principles of mutuality and
on „no-profit‟ basis. The note further read that there was a complete
identity between the contributors and the receipts of the fund, that is,
the assessee-company. The assessee-company rendered services
exclusively to the franchisees and that the franchisees had exclusive
ITA No. 1433/2008 Page 5 of 10
right over the surplus. The outlet of the franchisee did not derive any
profit from the funds. The funds of the assessee-company could only be
used for meeting expenses on their behalf or be returned to them.
4. The Assessing Officer examined the case laws and the details
submitted by the assessee-company. The Assessing Officer after
examining the contents of the SIA approval granted vide letter dated
05.10.1998 and the contents of the tripartite agreement returned the
following finding of facts:
“It was seen from the details filed by the assessee company
that in terms with the approval SIA as per clause 3 as
reproduced above in para VI.1, YRIPL and the franchisees
will contribute fixed percentage of their revenues to the
proposed new company i.e. assessee. Whereas clause 4.1
of the Tripartite operating agreement as reproduced
above in para VI.2, provides that YRIPL has no
obligation to contribute any amount which is
contradictory to the terms of approval of SIA.
Separate funds were to be maintained for KFC and Pizza Hut
brands. Further as per clause 5.1 as reproduced above
in para VI.2 of the operating agreement provides that
bank account of each brand fund established by
assessee-company will be notifying to the franchisee
and the franchisee will paying the advertising
contribution of 5% of revenues for a particular month
into such bank account. However, it was seen brand
funds was established by assessee-company. In fact,
YRIPL continued to receive the advertising contribution
from the franchisee as was being done by it prior to
setting up of assessee-company. This findings shows
that assessee-company has been used as a tool to evade
tax on excess of income over expenditure incurred in
during the previous year. A chart giving complete
details of contributions receivable by assessee-company
and amounts actually received by assessee-company
and YRIPL is being enclosed as Annexure ‘A’. This
annexure shows that most of the contribution has been
received by YRIPL which is against terms of SIA approval and
even the clauses of Tripartite operating agreement.
VI.5 Single Ledger Account- assessee-company and YRIPL –
considered as one entity-
Information under Section 133(6) was called from all the
franchisees. The information received from such
franchisees is analyzed in the ensuing paras below. In
their books of account, the franchisees have one ledger
account for royalties marketing advertising payable to
ITA No. 1433/2008 Page 6 of 10
YRIPL/assessee-company. For them it is single entity.
They have not maintained any separate account of
assessee-company. A few instances are discussed
below.......
.... The assessee-company was also informed about non
submission of details by Pepsi Foods Ltd. vide order
sheet entry 05.03.2004. It is pertinent to mention here
that as per details of contributions filed by the assessee
company M/s Pepsi Food Ltd’s Marketing Contributions
of Rs 32.70 lacs was received by YRIPL.
All the above findings make it clear that the assessee
company was not operating in terms with the SIA
approval .”
“It was seen from the details of accrued marketing filed
by the assessee company during the course of
assessment proceedings u/s 143(2) of the Income Tax
Act, 1961 in the case of M/s Yum! Restaurants India Pvt
Ltd pending before this office that not all the
franchises are paying 5% of their revenues : e.g. M/s
Devyani International Private Limited and Specialty
Restaurants were paying contribution @ 4% instead of 5% as
prescribed in the Tripartite agreement. All the participants
to the so called brand fund or so called ‘mutual
concern’ should have been contributing equally or an
equal proportion .
It is further seen that as for clause 3 of SIA letter as
reproduced in para VI.1 of this order the franchisees and
YRIPL were required to make contribution of affix (a fixed
percentage) of their respective revenue. However, as per
clause 4.1 of Tripartite operating agreement as reproduced in
para VI.2 of this order YRIPL is under no obligations to
payable any contribution if it chooses not to do so which is
totally in contradiction to SIA letter.”
4.1 From the aforesaid the Assessing Officer came to the
conclusion that the assessee-company was not operating in terms
of the SIA approval.
5. Based on these findings the Assessing Officer brought to tax a
sum of Rs 44,44,002/- which was an excess of income over expenditure
by rejecting the claim that it was a mutual concern.
6. Aggrieved by the same the assessee-company filed an appeal
before the Commissioner of Income Tax (Appeals) [hereinafter referred
to as the „CIT(A)]. The CIT(A), after analyzing all the facts and the case
laws in issue, was of the view that all the participants in the module set
ITA No. 1433/2008 Page 7 of 10
up by the assessee-company were business concerns and the purpose of
setting up of fund was a commercial purpose. The CIT(A) observed that
the advertising, marketing and promotional activities (hereinafter
referred to as the „APM activities‟) being a critical component of
running a successful business venture, it is intrinsically linked to profit
on sales of franchisees, that is, the contributors. It could not be said
that the contributors activity was immune from the taint of
„commerciality‟ and that unlike a club the assessee-company was not
set up for social intercourse nor was a set up for cultural activity where
the idea of profit or trade does not exist. What was essential was that
there should not be any dealing with the outside body which results in
benefit which promotes some commercial/business venture. He further
held that though the form taken up to conduct its activity resembles a
mutual concern, it could not however be denied that the contributions
were made undoubtedly for business considerations. The CIT(A) being
of the view that the underlying purpose was solely for commercial
consideration and excess of income over expenditure should be brought
to tax.
7. Being aggrieved, the assessee-company preferred an appeal to
the Tribunal. The Tribunal by the impugned judgment dismissed the
appeal of the assessee-company after noting the facts of the case as
well as the principle of mutuality invoked by the assessee-company to
sustain its stand that the said excess of income over expenditure was
not taxable. The Tribunal noted that in the present case the principle of
mutuality was not applicable on account of the fact that apart from
contributions received from various franchisees contributions to
the extent of 32.70 lacs had also been received from Pepsi Foods
Ltd as also from YRIPL, who were neither franchisees nor
ITA No. 1433/2008 Page 8 of 10
beneficiaries. As per the tripartite agreement it noted that
contributions were received from YRIPL, that is, the parent company
which was not under any obligation to pay. Therefore the essential
requirements of a mutual concern were missing. This was especially so
that since Pepsi Food Ltd and YRIPL who was a contributor to the fund
did not benefit from the APM activities. Thus the Tribunal held that the
principles of mutuality being not applicable to the excess of income over
expenditure was required to be taxed.
8. Having heard the learned counsel Mr C.S. Aggarwal, Sr. Advocate
for the assessee-company and Ms Prem Lata Bansal for the Revenue we
are of the view that the judgment deserves to be sustained. The
principle of mutuality as enunciated by the Courts in various cases is
applicable to a situation where the income of the mutual concern is the
contributions received from its contributors. The expenses incurred by
the mutual concerns are incurred from such contributions and hence on
the principle that no man can do business with himself, the excess of
income over expenditure is not amenable to tax. However, in the
present case the authorities below have returned a finding of fact that
the fund as contributors such as Pepsi Food Ltd which do not benefit
from the APM Activities. Moreover, the principle of mutuality is
applicable to those entities whose activities are not tinged with
commercial purpose. As a matter of fact in the instant case the parent
company i.e., YRIPL which has also contributed to the brand fund is
under the agreement under no obligation to do so. The contributions of
YRIPL are at its own discretion. Thus, looking at the facts obtaining in
the present case, it is quite clear that the principle of mutuality would
not be applicable to the instant case. This was the only stand taken by
the appellant before the authorities below. In these circumstances we
ITA No. 1433/2008 Page 9 of 10
are of the opinion that the impugned judgment of the Tribunal does not
call for interference. The authorities below have returned pure findings
of fact which are not perverse to our minds. No substantial question of
law arises for our consideration. Resultantly, the appeal is dismissed.
RAJIV SHAKDHER, J
April 01, 2009 VIKRAMAJIT SEN, J
kk
ITA No. 1433/2008 Page 10 of 10
% Judgment delivered on : 01.04.2009
ITA No. 1433/2008
YUM! RESTAURANTS (MARKETING) PRIVATE
LIMITED ..... Appellant
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash
Kumar, Advocate
For the Respondent : Ms Prem Lata Bansal, Mr Mohan Prasad Gupta &
Mr Sanjeev Rajpal, Advocates
CORAM :-
HON'BLE MR JUSTICE VIKRAMAJIT SEN
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported Yes
in the Digest ?
RAJIV SHAKDHER, J
1. This is an appeal preferred by the assessee-company under
Section 260A of the Income Tax Act, 1961 (hereinafter referred to as
the „Act‟) against the judgment dated 31.01.2008 passed by the Income
Tax Appellate Tribunal (hereinafter referred to as the „Tribunal‟) in ITA
No. 3235/Del/2005 pertaining to assessment year 2001-02.
2. The only issue which arose in this case is with respect to the
taxability of Rs 44,44,002/- being excess amount of income over
expenditure. The said surplus had arisen on account of advertisement
ITA No. 1433/2008 Page 1 of 10
contributions received from the holding company of the assessee-
company which remained unexpended.
2.1 The broad facts with respect to the above case have been
delineated in the connected appeal entitled Yum! Restaurant (India) Pvt
Ltd vs CIT; being ITA No. 192/2009, which was heard alongwith the
present appeal. Judgment was reserved in both the appeals.
3. Briefly, the parent company, that is, Yum! Restaurant (India) Pvt
Ltd (in short „YRIPL‟) formerly known as Tricon Restaurants India Pvt
Ltd was incorporated on 17.03.1994. The YRIPL had a licence
arrangement with Kentucky Fried Chicken International Holdings, Inc.
(in short „KFC‟) and Pizza Hut International LLC (in short „PHILLC‟).
The YRIPL sought permission from the Government of India, Ministry of
Industry, Department of Industrial Policy and Promotion, Secretariat
for Industrial Assistance (SIA), Foreign Collaboration, for setting up a
wholly owned step-down subsidiary to manage retail restaurant
business, for advertising and promotion at local store level, regional
level and national level. By a letter dated 05.10.1998, SIA granted
approval to YRIPL to set up a step-down wholly owned subsidiary on
the basis of a broad framework indicated by YRIPL. The broad
framework being that the proposed new subsidiary company would be a
non-profit enterprise which would be governed by the principles of
mutuality. The wholly owned subsidiary, as indicated by YRIPL, was
being set up to carry out and economise the cost of advertising and
promotion by catering to the specific needs of its franchisees in order
to enable them to concentrate on restaurant operations and
management. The approval was granted on the condition that the
subsidiary would be a non-profit enterprise and that it would not
repatriate its dividends out of the country.
ITA No. 1433/2008 Page 2 of 10
3.1 Upon receiving the requisite permission the assessee-company
was incorporated on 08.06.1999.
3.2 In September, 2000 the YRIPL, the assessee-company, as well as,
the franchisees entered into tripartite agreements. Under the
agreement the assessee-company received contributions from the
franchisees as well as the franchisees of the YRIPL to the extent of 5%
of the gross sales in order to carry on co-operative advertising. The
agreement also envisaged that the purpose of incorporating the
assessee-company was really to carry the marketing activities of each
of the brands of which YRIPL was a licensee for the mutual benefit of
the franchisees. The entire activity of the assessee-company was to be
carried out on no-profit basis and that the assessee-company was
obliged not to repatriate any dividends. The broad purpose of the
agreement is best encapsulated in the following clauses:-
“2.2 TRIM will establish and operate Brand Funds in
respect of each brand for the purpose of allocating and
using the advertising contribution received from
franchisee and other franchisee of Tricon operating
Restaurants under the Brands. TRIM will allocate the
advertising contribution received from the franchisees
including franchisee for each restaurant to the
respective Brand Funds established for that brand. It is
agreed between the parties that the advertising
contribution paid into a brand fund will be used for the
AMP activities relating to that brand.
3.1 As and from the Effective Date, franchisee will
pay the advertising contribution of 5% of Revenue for a
particular month into the bank account of the brand
th
fund established by TRIM by the 10 day of the
following month. Details of the bank account of each
brand fund set up by TRIM will be notified to franchisee
by TRIM from time to time. Notwithstanding the
aforesaid the executive committee of any Brand
(constituted under Article 7 of this Agreement) may, by
a three fourth majority, which shall be binding on all
franchisees of Tricon including the franchisee, require
the franchisee to pay the advertising contribution in
advance. For the avoidance of doubt it is clarified and
agreed that while recommending advance payment of
advertising contribution the chairman will not have a
casting vote.
ITA No. 1433/2008 Page 3 of 10
Franchise will spend an additional 1% of Revenues, in
the manner directed by Tricon and/or TRIM in writing
from time to time, on such local store marketing,
advertising, promotional and research expenditure
proposed by franchisee and approved in advance by
Tricon and/or TRIM during the relevant accounting
period, in accordance with the requirements and
guidelines set out in the manuals, provided that if
franchisee fails to spend the full amount as directed by
Tricon and/or TRIM franchisee will pay the unspent
amount to TRIM within the period specified in a written
demand from TRIM. Upon receipt of the unspent
amount TRIM will spend the amount on regional and/or
national advertising, promotions or research
expenditure conducted by TRIM in its discretion.......”
4.1 Tricon may at the request of TRIM, but subject
to Tricon’s sole and absolute discretion pay to
TRIM any such amount(s) as it may deem
appropriate to support the AMP activities during
any accounting period. For the avoidance of
doubt, it is clarified and agreed between the
parties that Tricon shall have no obligation to pay
any such amounts if it chooses not to do so.
xxxx
xxxx
8.4 In the event there is any surplus left over in any of
the Brand Funds at the end of an accounting period,
TRIM shall be entitled to retain the surplus to be spent
on AMP activities during the following accounting
period. Alternatively, TRIM may, subject to the
approval of its Board of Directors refund the surplus
amounts to the franchisees including Franchisee in the
same proportion as the actual advertising contribution
made by each franchisee including franchisee in that
accounting period.
On the other hand, if there is a deficit in any of the
brand funds at the end of an accounting period, the
deficit will be carried forward to the next accounting
period and be met out of the advertising contribution
paid by the franchisees including franchisee for that
accounting period. For the avoidance of doubt, it is
agreed between the parties that Tricon and/or TRIM
shall not be obliged to fund the deficit.
8.5 It is clearly understood and agreed between the
parties that the only objective of TRIM is to coordinate
the marketing activities of the brands including the
mutual benefit of the franchisees including the
franchisee. It is envisaged that no profits will be
earned and no dividends will be declared by TRIM.”
ITA No. 1433/2008 Page 4 of 10
3.3 It is in this background that on 31.10.2001 the assessee-company
filed its return for assessment year 2001-02. On 27.08.2002 the
assessee‟s return was processed under Section 143(1) of the Act. On
24.10.2002 the assessee‟s case was picked up for scrutiny and a notice
under Section 143(2) of the Act was issued to the assessee-company.
During the course of scrutiny, queries were raised with the
representatives of the assessee-company; whereupon it was revealed
that the assessee-company had an excess income over expenditure
amounting to Rs 44,44,002/-. However, the gross total income had been
declared as „nil‟. The income and expenditure account as recorded in
the order of the Assessing Officer read as follows:-
“INCOME
Advertising contribution from franchises,
Holding company and key associates 26469546
EXPENDITURE
Advertising, Marketing and Promotional 21256032
Expenditure
Preliminary expenses 454992
Administrative and other expenses 190272
21901296
Excess of expenditure carried forward from the (124248)
Previous year
Excess of income/ (Expenditure) over 4444002
(expenditure)/income carried forwarded to the
Balance sheet (included under current
Liabilities)”
3.4 With the return the assessee-company had appended the notes
broadly indicating that it was operating on principles of mutuality and
on „no-profit‟ basis. The note further read that there was a complete
identity between the contributors and the receipts of the fund, that is,
the assessee-company. The assessee-company rendered services
exclusively to the franchisees and that the franchisees had exclusive
ITA No. 1433/2008 Page 5 of 10
right over the surplus. The outlet of the franchisee did not derive any
profit from the funds. The funds of the assessee-company could only be
used for meeting expenses on their behalf or be returned to them.
4. The Assessing Officer examined the case laws and the details
submitted by the assessee-company. The Assessing Officer after
examining the contents of the SIA approval granted vide letter dated
05.10.1998 and the contents of the tripartite agreement returned the
following finding of facts:
“It was seen from the details filed by the assessee company
that in terms with the approval SIA as per clause 3 as
reproduced above in para VI.1, YRIPL and the franchisees
will contribute fixed percentage of their revenues to the
proposed new company i.e. assessee. Whereas clause 4.1
of the Tripartite operating agreement as reproduced
above in para VI.2, provides that YRIPL has no
obligation to contribute any amount which is
contradictory to the terms of approval of SIA.
Separate funds were to be maintained for KFC and Pizza Hut
brands. Further as per clause 5.1 as reproduced above
in para VI.2 of the operating agreement provides that
bank account of each brand fund established by
assessee-company will be notifying to the franchisee
and the franchisee will paying the advertising
contribution of 5% of revenues for a particular month
into such bank account. However, it was seen brand
funds was established by assessee-company. In fact,
YRIPL continued to receive the advertising contribution
from the franchisee as was being done by it prior to
setting up of assessee-company. This findings shows
that assessee-company has been used as a tool to evade
tax on excess of income over expenditure incurred in
during the previous year. A chart giving complete
details of contributions receivable by assessee-company
and amounts actually received by assessee-company
and YRIPL is being enclosed as Annexure ‘A’. This
annexure shows that most of the contribution has been
received by YRIPL which is against terms of SIA approval and
even the clauses of Tripartite operating agreement.
VI.5 Single Ledger Account- assessee-company and YRIPL –
considered as one entity-
Information under Section 133(6) was called from all the
franchisees. The information received from such
franchisees is analyzed in the ensuing paras below. In
their books of account, the franchisees have one ledger
account for royalties marketing advertising payable to
ITA No. 1433/2008 Page 6 of 10
YRIPL/assessee-company. For them it is single entity.
They have not maintained any separate account of
assessee-company. A few instances are discussed
below.......
.... The assessee-company was also informed about non
submission of details by Pepsi Foods Ltd. vide order
sheet entry 05.03.2004. It is pertinent to mention here
that as per details of contributions filed by the assessee
company M/s Pepsi Food Ltd’s Marketing Contributions
of Rs 32.70 lacs was received by YRIPL.
All the above findings make it clear that the assessee
company was not operating in terms with the SIA
approval .”
“It was seen from the details of accrued marketing filed
by the assessee company during the course of
assessment proceedings u/s 143(2) of the Income Tax
Act, 1961 in the case of M/s Yum! Restaurants India Pvt
Ltd pending before this office that not all the
franchises are paying 5% of their revenues : e.g. M/s
Devyani International Private Limited and Specialty
Restaurants were paying contribution @ 4% instead of 5% as
prescribed in the Tripartite agreement. All the participants
to the so called brand fund or so called ‘mutual
concern’ should have been contributing equally or an
equal proportion .
It is further seen that as for clause 3 of SIA letter as
reproduced in para VI.1 of this order the franchisees and
YRIPL were required to make contribution of affix (a fixed
percentage) of their respective revenue. However, as per
clause 4.1 of Tripartite operating agreement as reproduced in
para VI.2 of this order YRIPL is under no obligations to
payable any contribution if it chooses not to do so which is
totally in contradiction to SIA letter.”
4.1 From the aforesaid the Assessing Officer came to the
conclusion that the assessee-company was not operating in terms
of the SIA approval.
5. Based on these findings the Assessing Officer brought to tax a
sum of Rs 44,44,002/- which was an excess of income over expenditure
by rejecting the claim that it was a mutual concern.
6. Aggrieved by the same the assessee-company filed an appeal
before the Commissioner of Income Tax (Appeals) [hereinafter referred
to as the „CIT(A)]. The CIT(A), after analyzing all the facts and the case
laws in issue, was of the view that all the participants in the module set
ITA No. 1433/2008 Page 7 of 10
up by the assessee-company were business concerns and the purpose of
setting up of fund was a commercial purpose. The CIT(A) observed that
the advertising, marketing and promotional activities (hereinafter
referred to as the „APM activities‟) being a critical component of
running a successful business venture, it is intrinsically linked to profit
on sales of franchisees, that is, the contributors. It could not be said
that the contributors activity was immune from the taint of
„commerciality‟ and that unlike a club the assessee-company was not
set up for social intercourse nor was a set up for cultural activity where
the idea of profit or trade does not exist. What was essential was that
there should not be any dealing with the outside body which results in
benefit which promotes some commercial/business venture. He further
held that though the form taken up to conduct its activity resembles a
mutual concern, it could not however be denied that the contributions
were made undoubtedly for business considerations. The CIT(A) being
of the view that the underlying purpose was solely for commercial
consideration and excess of income over expenditure should be brought
to tax.
7. Being aggrieved, the assessee-company preferred an appeal to
the Tribunal. The Tribunal by the impugned judgment dismissed the
appeal of the assessee-company after noting the facts of the case as
well as the principle of mutuality invoked by the assessee-company to
sustain its stand that the said excess of income over expenditure was
not taxable. The Tribunal noted that in the present case the principle of
mutuality was not applicable on account of the fact that apart from
contributions received from various franchisees contributions to
the extent of 32.70 lacs had also been received from Pepsi Foods
Ltd as also from YRIPL, who were neither franchisees nor
ITA No. 1433/2008 Page 8 of 10
beneficiaries. As per the tripartite agreement it noted that
contributions were received from YRIPL, that is, the parent company
which was not under any obligation to pay. Therefore the essential
requirements of a mutual concern were missing. This was especially so
that since Pepsi Food Ltd and YRIPL who was a contributor to the fund
did not benefit from the APM activities. Thus the Tribunal held that the
principles of mutuality being not applicable to the excess of income over
expenditure was required to be taxed.
8. Having heard the learned counsel Mr C.S. Aggarwal, Sr. Advocate
for the assessee-company and Ms Prem Lata Bansal for the Revenue we
are of the view that the judgment deserves to be sustained. The
principle of mutuality as enunciated by the Courts in various cases is
applicable to a situation where the income of the mutual concern is the
contributions received from its contributors. The expenses incurred by
the mutual concerns are incurred from such contributions and hence on
the principle that no man can do business with himself, the excess of
income over expenditure is not amenable to tax. However, in the
present case the authorities below have returned a finding of fact that
the fund as contributors such as Pepsi Food Ltd which do not benefit
from the APM Activities. Moreover, the principle of mutuality is
applicable to those entities whose activities are not tinged with
commercial purpose. As a matter of fact in the instant case the parent
company i.e., YRIPL which has also contributed to the brand fund is
under the agreement under no obligation to do so. The contributions of
YRIPL are at its own discretion. Thus, looking at the facts obtaining in
the present case, it is quite clear that the principle of mutuality would
not be applicable to the instant case. This was the only stand taken by
the appellant before the authorities below. In these circumstances we
ITA No. 1433/2008 Page 9 of 10
are of the opinion that the impugned judgment of the Tribunal does not
call for interference. The authorities below have returned pure findings
of fact which are not perverse to our minds. No substantial question of
law arises for our consideration. Resultantly, the appeal is dismissed.
RAJIV SHAKDHER, J
April 01, 2009 VIKRAMAJIT SEN, J
kk
ITA No. 1433/2008 Page 10 of 10