YUM! RESTAURANTS (MARKETING) PRIVATE LIMITED versus COMMISSIONER OF INCOME TAX, DELHI

Citation: [2020] 11 S.C.R. 136 · Decided: 24-04-2020 · Supreme Court of India · Bench: A.M. KHANWILKAR · Disposal: Disposed off

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Judgment (excerpt)

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SUPREME COURT REPORTS
[2020] 11 S.C.R.
YUM! RESTAURANTS (MARKETING) PRIVATE LIMITED
v.
COMMISSIONER OF INCOME TAX, DELHI
(Civil Appeal No. 2847 of 2010)
APRIL 24, 2020
[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]
Doctrines / Principles – Doctrine of mutuality – Applicability
of, qua assessee-appellant company (YRMPL), a fully owned
subsidiary of YRIPL, incorporated for undertaking activities relating
to Advertising, Marketing and Promotion (AMP activities) for and
on behalf of YRIPL and its franchisees – Assessee was incorporated
by YRIPL as its fully owned subsidiary after approval from the
Secretariat for Industrial Assistance (SIA) – Such approval was
granted subject to conditions, inter alia, to operate on non-profit
basis on principles of mutuality – After SIA approval, assessee
entered into a Tripartite Operating Agreement with YRIPL and its
franchisees, wherein assessee received fixed contributions to the
extent of 5% of gross sales for proper conduct of advertising,
marketing and promotional activities for mutual benefit of the parent
company and the franchisees – For the Assessment Year under
consideration, assessee filed its returns stating the income to be
“Nil” on ground of mutual character of the company – Whether
assessee-company qualified as a mutual concern in the eyes of law,
thereby exempting subject transactions from tax liability – Held:
There are three conditions/tests to prove the existence of mutuality
– First test involves the test of common entity, and coterminous with
it, the requirement of commonality of identity – The moment a
transaction opens itself to non-members, either in the contribution
or the surplus, the uniformity of identity is impaired and the
transaction assumes the taint of a commercial transaction – On facts,
the purported mutual concern undertook a commercial venture
wherein contributions were accepted both from the members as well
as non-members – With the interference of an alien entity, the idea
of conducting business with oneself was defeated and any profits
or gains accruing therefrom became subject to tax liability – Thus,
doctrine of mutuality stood debunked with the failure of the first
test – Nonetheless, the second test of obedience to mandate and the
[2020] 11 S.C.R. 136
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third test of impossibility of profits were also contravened in the
factual scenario – The mandate of the assessee company was laid
down in the SIA approval wherein the twin conditions of mutuality
and non-profiteering were envisioned as the sine qua non for
functioning of assessee company – Contributions made by Pepsi
Foods Ltd. tainted the operations of assessee company with
commerciality and concomitantly contravened pre-requisites of
mutuality and non-profiteering – Third test of mutuality, which
requires the purported mutual operations to be marked by
impossibility of profits, also not fulfilled in the present case – One
member was vested with a myriad set of powers to control the
functioning and interests of other members (franchisees), even to
their detriment – The only entity that could derive any benefit from
the surplus funds was YRIPL, i.e. the parent company – This is
antithetical to the third test of mutuality – Appellant accordingly
failed to fulfil the stipulations and to prove the existence of mutuality
– It did not operate as a mutual concern – Taxation – Exemption.
Doctrines – Doctrine of mutuality – Doctrine of mutuality
traces its origin from the basic principle that a man cannot engage
into a business with himself.
Words and Phrases – Word “mutual” – Meaning of – Held:
The word “mutual” points towards reciprocity.
Taxation – “Mutual concern” – Quintessence for the existence
of a mutual concern – Discussed – Words and Phrases.
Interpretation of Statutes – Exemptions – Strict construction
– Exemptions are to be put to strict interpretation.
Disposing the appeal, the Court
HELD: 1.1. The doctrine of mutuality traces its origin from
the basic principle that a man cannot engage into a business with
himself.  For that reason, it is deemed in law that if the identity of
the seller and the buyer; or the vendor and the consumer; or the
contributor and the participator is marked by oneness, then a
profit motive cannot be attached to such a venture. Thus, for the
lack of a profit motive, the 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 T

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