Going into relationships

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R. Anand discusses the issue of employer-employee links in the fringe benefit tax regime

R. Anand

TWO key questions with respect to employer-employee relationship raised in Circular No.8/2005 on fringe benefit tax (FBT) are:

Whether employer-employee relationship is a pre-requisite for the levy of FBT?


Whether FBT is payable by an entity having no employee? For example, will law firms having retainer-relationship arrangements and no employees be liable to pay FBT?

An entity which does not have any employee on its rolls will not be liable to FBT. Therefore, law firms having retainer relationship arrangements and no employees will not be liable to FBT.

The crux of the issue relates to what constitutes employer-employee relationship. FBT is the result of payments made in the nature of perquisites to various categories of employees.

The background is unambiguous, with employees being those employed in an organisation where the employer disburses salaries, perquisites and various allowances. Read in this context, one can easily comprehend the sort of relationship that is addressed through the provisions of FBT. However, in reality, practical situations do crop up, particularly where some employees by virtue of different contracts with the employer need not be employees per se but quasi employees. How about FBT in such situations?

Employer and employee

The relationship between employer and employee can be understood in the context of income under the head `salaries'. This relationship is distinct and separate from that of principal and agent. An employee works under the direct control and supervision of his employer. He takes instructions from the employer and is subject to the right of the employer to control the manner in which he should carry out the instructions.

An agent, on the other hand, is generally free to carryout his principal's instructions according to his own direction and way of functioning. There cannot be any straitjacket approach to determining master-servant relationship, which is the cornerstone of any employer-employee relationship.

This has to be construed with reference to the terms of employment and conduct of the employee in the organisation.

It is settled law that a solicitor who is engaged by a client to do a particular work or a doctor who renders professional skill to a patient are not employees of the client or the patient (Carter vs Great West Lumber 1919 3 WWR 901). The nature and extent of control required to establish employer-employee relationship necessarily vary from business to business and cannot be brought under any precise definition.

Typically in any organisation doing business on a fairly acceptable scale, employees have to be appointed to carry on the business. The fear of FBT being circumvented by not appointing employees appears unfounded.

Consultancy relationship

This brings one to the question whether there is a possibility of pure consultants in an organisation being appointed, thereby de-linking the employer-employee relationship? While such a proposal looks attractive on paper, the task of converting whole-time employees to whole-time consultants is monumental.

The conduct of the consultant in an organisation will be the factor in deciding the individual's position, and not necessarily the term given through the letter of appointment.

The role of consultants in the context of Section 80RRA was examined by the Supreme Court in Central Board of Direct Taxes And Others vs Aditya V. Birla (170 ITR 137). The court held that fees received for consultant services can also be brought under the term "remuneration" for the purpose of Section 80RRA.

The court analysed employer-employee relationship on the following lines:

"The concept of employment involved three ingredients: i) employer, ii) employee, and iii) the contract of employment. Employee is one who works for others for hire. The employer is one who employs the services of other persons.

"In the context of this Act, therefore, the expression "employee" will include a consultant or a technician employed by the foreign company because he would be working for others for hire. It is true that the respondent may serve more than one master.

"A person may in certain circumstances serve two masters; very often he does serve many. The expression "to employ" has been considered in Ellis vs Joseph Ellis & Co. (1905 1 KB 324 CA) and does not mean generally to find actual employment; it rather means to retain and pay a person whether employed or not, but if employed then to be employed in the work only in respect of which contract is made.

"Medical advisers may be employed at a salary to be ready in case of illness; members of theoretical establishments in case their labour should be needed; household servants in performance of their duty when their masters wish; in these and other similar cases, the requirement of actual service is distinct from the employment by the party employing."

In an agreement to "retain and employ", "employ" means only to "retain" in the service "and is mere tautology" (see Stroud's Judicial Dictionary, 4th edition, Vol. 2, at page 893). The expression, however, must depend on the context of the particular provision in which the expression appears.

It was held in the UK that an engineer appointed by a local authority to supervise the execution of works, but not subject to the local authority's supervision, is nevertheless an "employee" within the meaning of Section 40(1) of the Local Government Superannuation Act, 1937 (Morren vs Swinton and Pendlebury Borough Council 1965 1 WLR 576 QB).

In Chambers' 20th Century Dictionary, "employ" has been indicated to mean `to occupy the time or attention of'. "Employment" means an act of employing.

In the Concise Oxford Dictionary, "employee" means person employed for wages. Employ means use of services of persons. It follows, therefore, that it comprehends a whole-time servant or a part-time engage.

The questions raised in the context of FBT are clear on this point. Employer-employee relationship is a prerequisite for FBT.

A firm having no employees on their rolls will not be liable to FBT. This looks exciting on paper, but is it possible for any firm either doing professional activity or carrying on business not to have a single employee on its rolls?

Hence, the issues raised appear to be hypothetical. Even if there is a single employee and the firm incurs expenditure covered under the various categories of deemed fringe benefits, there will be FBT on the entire expenditure and not just those relatable to the employees.

(The author is a Chennai-based chartered accountant.)

(This article was published in the Business Line print edition dated September 10, 2005)
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