The Delhi High Court’s recent landmark ruling in the case of Yoshio Kubo brings clarity to important issues related to the taxation of expatriates working in India.

In the case under dispute, the expatriate employees were either seconded to serve in the Indian subsidiary, or assist in the Indian operations of the foreign company. They were paid tax-free salary by their non-resident employers for their services in India. In some cases, the foreign employers were contributing to the home country’s social security, pension and medical insurance schemes.

Here are some key issues in this judgment:

Would the tax borne by the employer on behalf of the employee qualify as a ‘non-monetary’ perquisite and hence be exempt under section 10(10CC) of the Income-tax Act, 1961? Further, should such a tax be offered on a multiple gross-up basis or single gross-up basis?

Employers pay the tax liability of employees deputed to various countries to ensure they are not at a disadvantage from a tax perspective. In this regard, the law provides that tax on ‘non-monetary’ payments by the employer would be exempt in the hands of the employee. The issue is whether the tax paid by the employer is a ‘non-monetary’ payment, and hence eligible for exemption.

The Court held that to qualify as a monetary payment, it should be expressed in monetary terms in the hands of the employee… that is, treated as a part of salary. As the tax paid on behalf of an employee is not received by the employee, but goes directly to tax authorities, it would qualify as a non-monetary perquisite and hence for exemption.

Further, it was held that since such tax is itself exempt, the question of grossing it up does not arise. Hence, such tax should be subject to only a single gross-up… that is, it should be included only once as a part of income, and not a multiple gross-up. The decision reaffirms the earlier Delhi Special Bench decision in RBF Rig Corporation. Should the employer’s contribution towards social security, pension and medical insurance in the home country be taxable?

When an employee is deputed overseas, he would prefer to be a part of the social security, pension and other retirement benefits in his home country. The issue is whether the employer’s contribution to these benefits qualifies as a “vested” benefit to the employee and hence taxable as a perquisite.

The Court held that contribution by the employer in the home country does not result in a direct benefit to the assessee, and it would vest only when a contingency occurs. Hence, the employee has no right to the contribution until the contingency occurs.

Based on facts and relying on the Supreme Court ruling in the case of L.W. Russel, the Court observed that the contribution towards social security and pension schemes does not vest the employee with any right over it at the time of contribution. Hence, it should not be taxable in the hands of the employee.

Further, with regard to insurance plans, the Court observed that such contributions are made to benefit the employer and as protection from the loss of employment, sickness, death or accident of the employee. Hence, it would not be taxable in the hands of the employee.

While the decision confirms the non-taxability of an employer’s contribution to such retirement plans, it is essential to review each plan specifically to determine the time of accrual to the assignee and the conditions attached. The taxability should be decided accordingly. Should ‘hypothetical tax’ recovered from an employee be considered a deduction?

Under the tax equalisation policy, the expatriate employee bears his home country taxes by way of a deduction from his salary known as “hypothetical tax’. Should this be allowed as a deduction while computing the tax liability.

Following the decisions of the Bombay High Court in the case of Jaydev H. Raja and Dr Percy Batlivala, the Court concluded that the hypothetical taxes recovered from the employee are eligible for deduction to arrive at the taxable salary, as it never accrued to the employee.

Homi Mistry is Partner, Niji Arora is Manager, and Vivek Mistry is Deputy Manager, Deloitte Haskins & Sells

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