Advance Ruling on FBT modified by Supreme Court

AIT News Network

NEW DELHI. The Apex Court vide a ruling dated 6^th May 2008 AIT-2008-159-SC has modified the Advance Ruling on Fringe Benefit Tax in case of R & B Falcon (A) Pty Ltd AIT-2007-74 -AAR. Interpretation and/or application of the provisions of Section 115WB of the Income Tax Act, 1961 providing for imposition of tax on 'fringe benefits' was in question in the appeal. 

                Appellant is incorporated under the laws of the Commonwealth of Australia.  It is engaged in the business of providing Mobile Offshore Drilling Rig (MODR) along with crew on a day rate charter hire basis to drill offshore wells.  The MODR operates offshore (upto 200 nautical miles off the coast of India).  Allegedly, having regard to the harsh working environment and purported to be in line with global practices typical to such industry, the employees who may be residents of various countries including Australia, USA, UK, France etc. work on the MODR on a 'commuter basis'.  They come to India, stay in the Rig for 28 days and go back to their own country being their place of residence for a further period of 28 days.  The crew or the employees are transported from their home country to the

MODR in two laps :

-               first is from the nearest designated base city at the place of residence in the home country to a designated city in India for which the petitioner provides free air tickets of economy class and;

-               second is from that city in India to the MODR through helicopter especially hired by the petitioner for this purpose.

On completion of 28 days, they go back from the Rig to the designated base city in their home country in the same manner.  Appellant states that no conveyance/transport allowance is paid to them.  Appellant entered into a contract of supplying MODR along with equipment and offshore crew on charter hire basis with Oil and Natural Gas Commission, a public sector undertaking, on or about 10.10.2003.  It filed an application under Section 245Q(1) of the Income Tax Act, 1961 before the Authority for Advance Ruling (AAR) on the following question :

"Whether transportation cost incurred by the petitioner 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?"

                AAR by reason of its judgment and order dated 13.12.2006 holding that the company is liable to pay fringe benefit tax for providing transportation and movement of offshore employees for their residence and home countries outside India to the place of rig and back, opined that

(1)           The exemption provision contained in sub-section (3) of Section 115WB is restricted to sub-section (1) whereas the exemption falls under the deeming provision contained in sub-section (2);

(2)           Residence within the meaning of the said provision would mean residence in India and as the employees concerned are residents of the countries outside India, sub-section (3) of Section 115WB is not applicable.

                SC Ruled as under:

The employees concerned are experts in their field.  They are necessarily residents of other country.  They are brought to the Rig by providing air tickets for their coming from their place of residence to the Rig.

                The employer incurs the said expenditure as of necessity.  It, therefore, clearly falls within the purview of the words 'consideration for employment'.  If fringe benefits are provided for consideration for employment, which is given or provided to the employee by way of an amenity, reimbursement or otherwise; clearly clause (a) of sub-section (1) shall be attracted. 

                A statute, as is well known, must be read in its entirety.  What would be the subject matter of tax is contained in sub-sections (1) and (2).  Sub-section (3), therefore, provides for an exemption.  There cannot be any doubt or dispute that the latter part of the contents of sub-section (3) must be given its logical meaning.  What is sought to be excluded must be held to be included first.  If the submission of learned Solicitor General is accepted, there would not be any provision for exclusion from payment of tax any amenity in the nature of free or subsidized transport.

                Thus, when the expenditure incurred by the employer so as to enable the employee to undertake a journey from his place of residence to the place of work or either reimbursement of the amount of journey or free tickets therefor are provided by him, the same, in our opinion, would come within the purview of the term 'by way of reimbursement or otherwise'. 

                The Parliament, in introducing the concept of fringe benefits, was clear in its mind in so for as on the one hand it avoided imposition of double taxation, i.e., tax both on the hands of the employees and employers; on the other, it intended to bring succour to the employers offering some privilege, service, facility or amenity which was otherwise thought to be necessary or expedient.  If any other construction is put to sub-sections (1) and (3), the purpose of grant of exemption shall be defeated.  If the latter part of sub-section (3) cannot be given any meaning, it will result in an anomaly or absurdity. 

AAR was right in its opinion that the matters enumerated in sub-section (2) of Section 115WB are not covered by sub-section (3) thereof, and the amenity in the nature of free or subsidized transport is covered by sub-section (1).

                On the next question, namely, whether the employee concerned should be a resident of India.  The statute does not say so.  Fringe benefit tax being a tax on expenditure; the only concern of the revenue wherefor should be as to whether such expenditure has been made.  Appellant has a permanent establishment in India.  It pays income-tax in India.  It carries on business in India.  It has for the purpose of carrying out its business activities engaged persons from within India or outside India.  If it makes any expenditure for bringing any employee from abroad, the same would also liable to be taken into consideration for the purpose of sub-section (1) of Section 115WB.

                AAR with respect was not correct in its view in reading the words 'in India' after the word residence in sub-section (3).

                If the reasonings of the AAR are taken to its logical conclusion, the CBDT circular would not be attracted.  An employer cannot afford to loose on both the fronts.  Its right to claim exemptions either would be in respect of the employees who are based in India or who are not.  If the said employees are required to be based in India, sub-section of Section 115WB would not be attracted.  However, if such expenditure incurred is found to be as consideration for employment, the same would also bring within its purview the employees who have been hired from outside the country.  For the purpose of obtaining the benefit of the said exemption, however, the expenditure must be incurred on the employees directly for the purposes mentioned therein, namely, they are to be provided transport from their residence to the place of work or such place of work to the place of residence.  Any expenditure incurred for any other purpose, namely, other than for their transport from their residence to the place of work or from the place of work to the place of residence would not attract the exemption provision.  The Assessing Authority, therefore, must, in each case, would have a right to scrutinize the claim.  CBDT has the requisite jurisdiction to interpret the provisions of Income-tax Act.  The interpretation of CBDT being in the realm of executive construction, should ordinarily be held to be binding, save and except where it violates any provisions of law or is contrary to any judgment rendered by the courts.  The reason for giving effect to such executive construction is not only same as contemporaneous which would come within the purview of the maxim temporania caste pesto, even in certain situation a representation made by an authority like Minister presenting the Bill before the Parliament may also be found bound thereby.

                However, it appears that the contention that such expenditure should be paid on a regular basis or what would be the effect of the words 'employees journey' did not fall for consideration of AAR.  What, therefore, is relevant would be the nature of expenses.  The question as to whether the nature of a travelling expenditure incurred by the appellant would attract the benefits sought to be granted by the statute did not and could not fall for consideration of the AAR.  Its opinion was sought for only on one issue.  It necessarily had to confine itself to that one and no other. 

(Click here for full text of Ruling AIT-2008-159-SC)

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