Delhi High Court Exempts Deloitte Subscription Fees from Tax on Mutuality Principle

Delhi High Court Exempts Deloitte Subscription Fees from Tax on Mutuality Principle

The Delhi High Court has ruled that subscription fees received by Deloitte are tax-exempt under the principle of mutuality.

The Bench of Justices Rajiv Shakdher and Girish Kathpalia observed that the term "mutuality" refers to a reciprocal arrangement in which all parties have equal rights, obligations, and benefits. This is unlike an arrangement where one party has absolute discretion over another, or where one party bears all the liability while the others reap all the benefits. In a mutual concern, all members may or may not have an obligation to pay, but no one member should have overriding discretion over the others. In other words, the association should exist only for the benefit of its members.

The respondent/assessee Verein is a Swiss association with members who are chartered accountant firms from around the world. For the relevant assessment years (2008-09 to 2011-12), Verein filed income tax returns declaring nil income. However, the assessee also claimed a refund of ₹1,35,18,298 in the income tax return for Assessment Year 2011-12.

Dissatisfied with the assessment orders, the assessee appealed to the Commissioner of Income Tax (CIT(A)), who allowed the appeals.

The CIT(A) noted that Verein is registered as a non-profit entity under Swiss law and that the recoveries made by the assessee from its members cannot be considered trading receipts. It is covered by the concept of mutuality.

The Income Tax Appellate Tribunal (ITAT) dismissed the first appeal filed by the appellant/revenue. The ITAT reaffirmed that the Articles of Verein, together with the rest of the records, established that Verein operates on the principles of mutuality, and therefore, the money it receives in the form of subscriptions is not taxable.

The issue was whether the Tribunal made a mistake in holding that the assessee's receipts were not in the nature of fees for technical services and that they were exempt from tax under the principle of mutuality.

The department argued that the Tribunal's order was not legally sustainable because it failed to recognise that the assessee was providing specific services to its members, which those members were then exploiting commercially. The so-called subscription fee charged by the assessee for its services to its members cannot be considered a contribution. Instead, it was a payment made by the assessee's members for various services, including information technology-related services. Therefore, the assessee was trading with its members, not with itself.

The assessee argued that it is a non-profit entity registered under Swiss law and that the fact that its members contribute to its budgeted expenditure based on their turnover does not change the nature of the subscription fee for technical services.

The Court held that the assessee Verein's receipts from its members were not fees for technical services and were exempt from tax under the principle of mutuality.