Sunday, August 3, 2008

Supreme Court on Fringe Benefit Taxes

(In the following post Shantanu Naravane, a 4th Year B.A., LL.B (Hons.) student at the National Law School of India University, Bangalore, examines one of the first Supreme Court decisions on fringe benefit taxes)

Ever since its introduction by the 2005 Finance Act, the concept of Fringe Benefit Taxes [“FBT”] has spawned several controversies. However, the first judicial consideration of its provisions is the recent decision of the Supreme Court in R & B Falcon (A) Pty. Ltd. v. CIT (Appeal (civil) 3326 of 2008).

The Appellant was a company incorporated in Australia, and was 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. By virtue of an agreement with ONGC for supplying MODR along with equipment and offshore crew, the employees of the Appellant were to work on the MODR on commuter basis. An employee worked on MODR for 28 days, (on-days) alternated by a 28 days field break, (off-days) when he stayed at the place of his residence. The members of the crew were residents of various countries and were transported from their home country to the MODR in two laps: (i) from the nearest designated base city at the place of residence in the home country to a designated city in India; and (ii) from that city in India to MODR through helicopter especially hired by the applicant for this purpose. On the completion of 28 days they were transported back from MODR to the designated base city in their home country in the same manner. The Appellant provided free air tickets of economy class for lap (i) of the journey, and the corresponding return leg, while not paying any conveyance/transportation allowance. The question was whether this provision of free transport was liable to taxation under the FBT regime.

U/s. 115WB(1)(a), a fringe benefit means a consideration for employment provided by way of any ‘privilege, service, facility or amenity … provided by an employer, whether by way of reimbursement or otherwise, to his employees’. S. 115WB(1)(b) also includes ‘any free or concessional ticket provided by the employer for private journeys of his employees of their family members’ as a fringe benefit. S. 115WB(2) deems certain expenditures to be fringe benefits, of which two expenditures relevant for the purposes of this issue are ‘conveyance’ and ‘tour and travel (including foreign travel)’. Finally, s. 115WB(3) provides that for the purposes of sub-section (1), privilege, service, facility or amenity shall not include any allowance provided by the employer ‘for journeys by their employees from their residence to the place of work, or such place of work to the place of residence’.

The crux of the issue was whether the exemption to FBT provided under sub-section (3) could be availed of in this case. Before the Authority for Advance Rulings [“AAR”], the Respondents (Tax Department) contended that:

(a) the exemption under sub-section (3) was only in respect of sub-section (1) and since the tickets here fell within sub-section (2), no exemption could be claimed;

(b) in any event, for the purposes of the section, the ‘residence’ would be the residence on the rig, and not their actual residence; and

(c) the provision applied only to employees resident in India, and since the employees here lived abroad, the exemption could not be claimed by them.

The AAR held that ‘residence’ would not include residence on the rig, and refers to the actual residence. However, they upheld contentions (a) & (c), and held that FBT could be charged. This decision was reversed in appeal by the Supreme Court.

The Court upheld contention (a), holding that sub-section (3) was an exception only to sub-section (1) and not (2). However, they also pointed out that this holding should not be interpreted in such a way as to render sub-section (3) nugatory. If the only expenditures on transport formed part of sub-section (2), sub-section (3) would be denuded of all meaning, since there would be no taxable benefit under sub-section (1), which was being exempted under sub-section (3). Thus, in order to give effect to sub-section (3), they held that all expenditures other than ‘conveyance’ and ‘tour and travel’ would be included under the term ‘or otherwise’ used in sub-section (1). Thus, although the Court agreed with the decision of the AAR on the scope of sub-section (3), they re-interpreted sub-section (1) to include the tickets provided within its ambit. The Court also reversed the decision of the AAR that the employees needed to be Indian residents for the exemption to apply, on the grounds that such an interpretation would be iniquitous and did not follow from the section.

However, one additional contention was also raised before the Supreme Court, i.e. for the purpose of falling within the exemption under sub-section (3), the allowance has to be for regular journeys, and not for periodical journeys like the ones being undertaken here. The Court chose not to answer the question since the argument had not been raised before the AAR and no evidence was on record as to the nature of the payments made. However, an examination of the AAR decision seems to suggest that if this issue were to arise in the future, the argument would be rejected. Sub-section (3) only talks about a journey from ‘residence’ to ‘place of work’. The AAR categorically stated that the term connotes a permanent residence and “not a place where a person is required to stay for a short duration in connection with his duties like the stay at the rig”. Thus, it decided that in the facts at hand here, the homes of the employees, wherever situated, would be their ‘residence’ for the purposes of sub-section (3). Now, if that is accepted, there seems no rationale for allowing an exemption if the transport from the residence is daily, and not allowing it if it is on a bi-monthly basis. At best, a requirement of periodicity can be imposed, given the object of the section. But that requirement too, had been satisfied here. Thus, it seems highly probable that the requirement of daily commuting is not required under sub-section (3).

In arriving at its decision, the Court repeatedly asserted the object of introducing the FBT, and reiterated the importance of using that object as a guiding principle in interpreting the relevant provisions. Thus, apart from the obvious precendential value of the decision, it also assumes significance as laying down some of the guiding principles for future decisions on FBT-related issues.

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