The Hindu Business Line : Does FBT apply to non-residents?

It was Finance Act 2005 that introduced the Fringe Benefit Tax in the Indian Income Tax Act. It came into force with effect from April 1, 2006. This is a new concept in India. It covers Fringe Benefit provided or deemed to have been provided by the employer to the employees during the previous year and the rate is 30 per cent of the value of such fringe benefits.

The object was to bring about equity in the tax system. The employer deducts the expenditure for the benefit of the employees, including entertainment, in the computation of his taxable income.

On the other hand, when the employees getting perks are to be taxed, those who get direct or indirect benefits from the expenditures incurred by the employer get away without paying tax on the benefit. The FBT brings about horizontal equity.

Section 115WB of the Act contains the interpretation Section. Section 115WB(1) provides for a direct meaning and takes within its sweep any consideration for employment by way of privilege, service, facility or amenity directly or indirectly. 115WB(2) expands the definition and provides for deemed benefit. The legal fiction under Section 115WB(2) brings within its purview benefits that would be deemed to have been provided by the employer to the employee during the previous year.

Complicated provisions

The Central Board of Direct Taxes issued a Circular No. 8 of 2005 explaining the complicated provisions.

The Circular posed several questions. Is FBT payable by an Indian company having employees based both inside and outside India on its total global expenditure incurred by it on the employees?

The answer was that the value of Fringe Benefits is determined as a proportion of the total amount of expenditure incurred for some identified purposes.

If an Indian company carries on business outside India, would it be liable to FBT even though none of its employees in such business may be liable to pay income tax in India? The answer was that if the employees are not based in India, such company would not be liable to FBT in India.

The next question was whether FBT applies to foreign companies. The CBDT answered: “FBT will apply to foreign companies if they have employees based in India”. R&B Falcon (A) Pty Ltd., Vs CIT (2008) 169 Taxman 515 (SC)

Apex court ruling

The Supreme Court considered the ramifications of the FBT in its latest ruling delivered on May 6, 2008. The case before the Supreme Court concerned an Australian company 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 Rig operated Offshore up to 200 nautical miles off the coast of India. In line with global practices typical to such industry, employees belonging to various countries including Australia, the US, the UK and France work on the Rig on a ‘commuter basis’. They come to India, stay in the Rig for 28 days and go back to their own country.

The crew for the employees are transported from their home country to the Rig, first from the nearest designated base City at the place of residence in the home country to a designated city in India for which the employer company provides free air-ticket and second, from the city in India to the Rig through helicopter especially hired by the company for this purpose.

The company paid no conveyance or transport allowance. It had entered into a contract for supplying Rig along with equipment and offshore crew on charter hire basis with the ONGC.

The question before the Supreme Court was whether transportation cost incurred by the company in providing transportation facility for movement of offshore employees from the residence in home country to the place of work and back is liable to FBT.

Detailed interpretation

The Supreme Court pointed out that under Section 115WB (1), Fringe Benefits meant consideration for employment provided by way of any privilege service, facility or amenity by way of reimbursement or otherwise to the employees, including former employees. The travel expenditure represented consideration for employment, given to the employee by way of amenity, reimbursement or otherwise. The Supreme Court concluded, “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 thereof or provided by him, the same, in our opinion, would come within the purview of the term “by way of reimbursement or otherwise”.

The Court also considered the question whether the employee concerned should be a Resident of India. It pointed out that the statute does not say so. The Australian company had a Permanent Establishment in India. It pays income tax in India and carries on business in India. If it makes any expenditure for bringing any employee from abroad, the same would also be liable to be taken into consideration for the purpose of 115WB(1).

This is probably the first judgment of the Supreme Court involving detailed interpretation of the FBT.

(The author is a former Chief Commissioner of Income-Tax)

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