New Delhi: The Supreme Court on 6 May passed its first ever judgement on the fringe benefit tax, or FBT, and in the process sought to define limits for the controversial tax introduced three years ago.
FBT, introduced in the Finance Act, 2005, was intended as a levy on the employer in relation to fringe benefits and perquisites enjoyed by employees, in cases where it was not possible to identify the individual tax base. It was pegged at 30% of the cost of the benefits extended by the company.
India’s apex court ruled that the money spent by an Australian company, R&B Falcon, a service provider in the offshore oil drilling businesses, in transporting people across the world to manage rigs in waters off the Indian coast should not be subject to FBT.
“Supreme Court rulings under the Constitution become the law of the land. An assessing officer (of the income-tax department) cannot pass an order that is not in consonance with a Supreme Court ruling in similar facts in any other case,” said Sudhir Kapadia, head, tax and regulatory services at audit and consulting firm KPMG.
Public sector oil exploration company Oil and Natural Gas Corp. charters R&B Falcon’s equipment and crew for offshore rigs.
The Australian company, which transports employees, in some instances from their country of origin to India and then to the oil rigs, approached the Authority for Advance Ruling (AAR) to find out if the transport expenses attracted FBT. Overseas companies with business interests in India are allowed to approach AAR when they want a clarification on grey areas in taxation.
In December 2006, AAR said FBT could be levied on the transport expenses. Following this, R&B Falcon approached the Supreme Court. This is among the few AAR rulings taken to the Supreme Court. An earlier case involved the business process outsourcing arm of US investment bank Morgan Stanley.
“If you have oilfield employees who are mobilized from one country to another, the term of residence and place of work cannot be given a narrow interpretation,” said an expert who did not wish to be identified.
“The operative part of the judgement indicates it (cost on transporting employees) ought not to be subject to FBT,” the expert added.
FBT was introduced in 2005 by finance minister P. Chidambaram with the aim of enhancing fairness in taxing salaried employees. FBT forces companies to pay taxes on perquisites handed out to employees. Industry lobbies protested when it was introduced as they felt the wide scope for interpretation of the working of the concept would lead to a relatively high level of litigation.
The part of Income-tax Act dealing with FBT provides companies exemptions on some items such as transporting employees from their residence to place of work.
AAR, in its ruling, felt R&B Falcon did not qualify for an exemption from FBT on the costs incurred in moving employees from overseas to its rigs off the Indian coast. One of the grounds on which AAR rejected the company’s claim for exemption was that R&B Falcon’s employees are not residents of India.
The Supreme Court rejected AAR’s argument.
“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,” said the Supreme Court judgement.
“AAR with respect was not correct in its views in reading the words ‘in India’ after the word residence in sub-section (3),” said the judgement.
Sub-section (3) in this case is the part of the income-tax Act dealing with FBT which identifies expenditure that ought to be exempt from tax.