Analysis of recent Supreme Court judgements

Introduction

The importance of above ruling is highlighted by the fact that same is first Indian judicial and that too from SC, in context of Fringe Benefit Tax (FBT) provisions introduced in the Income Tax Act (Act) by Finance Act, 2005 with effect from AY 2006-2007.

Background in brief

Assessee (R& B Falcon) incorporated in Australia, is engaged in business of supplying Mobile Offshore Drilling Rig (MODR) along with off-shore supporting staff, to units operating in oil and gas industry like ONGC etc. Word “off-shore” here signifies operating in off-shore area. In relation to the subject MODR’s, assessee provided staff/crew to operate the same and since the conditions in MODR are not congenial to working, employees (here residents of foreign country), worked on the MODR on “commuter basis” that is, they come to India and stay in the Rig (MODR) for 28 days and go back to their country of residence and so on and so forth. The transportation costs for commutation in terms of provision of air tickets was borne by employer. In this connection, assessee in relation to its subject contract with ONGC applied to Authority for Advance Ruling (AAR) seeking its views on:

“Whether transportation cost incurred by R and B Falcon (A) Pty Limited (hereinafter referred to as the “Applicant”) in providing transportation facility for movement of offshore employees from their residence in home country to the place of work and back is liable to Fringe Benefit Tax (‘FBT”)?

AAR’S VIEWS

In relation to its contention that FBT is not leviable on aforesaid transportation costs, Assessee/applicant interalia placed reliance on CBDT Circular no. 8 of 2005 which stated that:

“104. Whether expenditure incurred by the employer for the purposes of providing free or subsidized transport for journeys to employees from their residence to the place of work or such place of work to the place of residence would attract FBT?

Ans. The free or subsidized transport provided to employees for journeys from their residence to the place of work or such place of work to the place of residence is in lieu of conveyance/transportation allowance, which is not liable to FBT. Accordingly, the expenditure incurred by the employer for the purposes of providing free or subsidized transport for journeys to employees from their residence to the place of work or such place of work to the place of residence will not be liable to FBT”.

AAR while rejecting assessee’s contention and concluding that FBT is leviable on subject transportation costs, interalia held that:

“From a cursory reading of the above question and the answer, it appears that the free or subsidized transport provided to employees for journeys from their residence to the place of the work or such place of work to the place of residence if in lieu of conveyance/transportation allowance, is not liable to FBT and therefore the expenditure incurred by the employer thereof will not be liable to FBT. The gist of the aforementioned question and answer is to be found in the amended sub-section (3) of Section 115WB.

However, a careful reading and the context of question no. 104 and the answer and our finding on the second limb of subsection (3) of section 115WB, would disclose that the journeys of the employees spoken of therein relate to journeys from the residence of the employees within India to the place of work in India. The transportation of employees in the instant case, according to the applicant as well as for purposes of the question, is from their residences in the home countries (outside India) to the place of work in India (the rig).”

Assessee’s SLP before Supreme Court

In relation to aforesaid AAR, assessee filed Special Leave Petition before SC and inter-alia contended that:

“(4) Residence of an employee being not restricted to the Territory of India, the AAR committed a serious error of law in passing the impugned judgment.

(5) CBDT itself, in its circular, having clarified that sub-section (2) is merely an expansion of sub-section (1), it was impermissible for the AAR to take the said factor into account.

(6) From the questions and answers contained in the said circular, it is evident that fringe benefit tax would be applicable on the value of fringe benefit provided or deemed to have been provided to employees based in India and no fringe benefit tax would be payable in respect of an expenditure incurred by the employer for an employee who is not based in India and in any event if the employee is based in a foreign country would also come within the purview thereof.

(7) The AAR is clearly wrong in holding that the word ‘residence’ would mean only residence in India.”

SC’s Observation and Conclusions

In aforesaid connection, SC inter-alia concluded as under:

a) Section 115WB which is divided in three sub-sections, sub-section (1) provides for direct benefits provided by employer and sub-section (2) provides for “other benefits” i.e in words of SC :“Whereas sub-section (1) envisages any amount paid to the employee by way of consideration for employment, what would be the limits thereof are only enumerated in sub-Section (2).” After so holding, SC held that sub section (1) and sub –section (2) of section 115WB operates in different fields.

b) Subject transportations costs incurred by employer assessee, falls within purview of “consideration for employment” as envisaged in sub-section (1) of section 115WB, being provided to employee by employer and is covered under expression “by reimbursement or otherwise” as stipulated in section 115WB(1).

c) Matters covered by sub-section (2) which provides for “deeming benefits” are not eligible for/covered by sub-section (3) thereof (which provides exemption from FBT to perquisites etc taxable as “salary”, free /subsidized transport provided by employer etc) as the same is restricted for sub-section (1) thereof.

d) As regards reading of words “in India” by AAR in the expression “any benefit or amenity in the nature of free or subsidized transport or any such allowance provided by the employer to his employees for journeys by the employees from their residence to the place of work or such place of work to the place of residence”, after the word “residence” and hence, restricting its applicability to commutation within India, SC while rejecting the same inter-alia held as under:

“21. AAR with respect was not correct in its view in reading the words ‘in India’ after the word residence in sub-section (3).”

e) As regards revenue’s contention that words “employees journey” as used in subject section 115WB(3) giving exemption to transport costs etc, postulates only regular journey and not periodic journey (like here journey is taking place at gap of 28 days), SC without giving any finding thereon, held that it for assessing authority to examine on case-to-case on the basis of material placed on record.

Impact Analysis on Ongoing Matter

As regards interpretation on using of words “in India” in provisions of the Act, Mum ITAT in STAR case 99 ITD 91 has earlier turned down assessee’s contention that words “in India” needs to be read into section 195 of the Act and that section 195(1) should be restricted to payments in India. This ruling of SC which has accepted assessee’s plea that words “in India” are not to be read into section 115WB(3), needs to be examined in depth, how far (if any) impact is casted on section 195 of the Act dealing with TDS on Non Resident Payments. In the understanding of the author, same may distinguished as regards section 195 is concerned as the same is machinery provision and section 115WB(3) is beneficent provision.

In aforesaid connection, reference may be made to DHC ruling in the case of American Hotel 289 ITR 46 wherein after relying on section 1(2) defining scope of the Act, words “in India” were read into section 10(23C) of the Act which were otherwise not there, reasoning that section 1(2) of the Act which states that this Act shall extend to India makes this law non extra-territorial in nature. SC on assessee’s appeal in this case, has since concluded the hearings and reserved its judgment, which may be expected to be pronounced shortly.