Supreme court of india

R & B Falcon (A) Pty Ltd.

v.

Commissioner of Income-tax

S.B. SINHA AND V.S. SIRPURKAR, JJ.

Civil Appeal No. 3326 of 2008

May 6, 2008

Section 115WB of the Income-tax Act, 1961 - Fringe benefits - Meaning of - Whether sub-sections (1) and (2) of section 115WB must be held to be operating in different fields - Held, yes - Whether matters enumerated in sub-section (2) of section 115WB are not covered by sub-section (3) thereof - Held, yes - Whether amenity in nature of free or subsidized transport is covered by sub-section (1) - Held, yes - Whether fringe benefit tax being a tax on expenditure, only concern of revenue wherefor should be as to whether such expenditure has been made; statute does not say that employee concerned should be a resident of India - Held, yes - Whether the words ‘in India’ can be read after the word ‘residence’ in sub-section (3) - Held, no - Whether transportation cost incurred by appellant, a non-resident-company, in providing transportation facility for movement of its offshore employees from their residence in home country (outside India) to place of work (rigs in India) and back is liable to fringe benefit tax - Held, no

Circulars and Notifications - CBDT Circular No. 8 of 2005, dated 29-8-2005

Facts

The appellant, a non-resident company, 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. It entered into an agreement with an Indian company for supplying MODR along with equipment and offshore crew. The employees of appellant were resident of various countries and worked on the MODR on ‘commuter basis’. The employees came to India, stayed in the rig for 28 days and went back to their own country being their place of residence for a further period of 28 days. The crew or the employees were transported from their home country to the MODR in two laps - the first was from the nearest designated base city at place of residence in the home country to a designated city in India for which the appellant provided free air tickets and second was from that city in India to MODR through helicopter, especially hired by it for that purpose. On completion of 28 days, they went back from the rig to the designated base city in their home country in the same manner. The crew was not paid any conveyance/transport allowance. The appellant filed an application under section 245Q(1) before the Authority for Advance Ruling (AAR), seeking ruling on the question as to whether transportation cost incurred by the appellant in providing transportation facility for movement of offshore employees from their residence in home country to the place of work and back is liable to fringe benefit tax. The AAR opined that the exemption provision contained in section 115WB (3) is restricted to sub-section (1), whereas the exemption sought for falls under the deeming provision contained in sub-section (2); and that residence within the meaning of the said provision would mean residence in India and as the employees concerned are residents of the countries outside India, sub-section (3) of section 115WB is not applicable. Thus, the AAR came to conclusion that the company is liable to pay fringe benefit tax on expenditure incurred for providing transportation and movement of offshore employees from their residence and home countries outside India to the place of rig and back.

On appeal to the Supreme Court, the appellant submitted as under :

(1) The AAR committed an error of law insofar as it failed to consider that sub-section (3) covers both the contingencies envisaged under sub-sections (1) and (2);

(2) The distinction between sub-sections (1) and (2) is highly artificial inasmuch as the exemption is provided for in clauses (F) and (Q) of sub-section (2) of section 115WB and unless the said provisions are read into sub-section (3), the same would be rendered otiose;

(3) While granting exemption, the Parliament having not restricted the operation of sub-section (3) only to the regular employees or the transport provided by the employer, no restrictive meaning can be given to sub-section (3).

(4) Residence of an employee being not restricted to the territory of India, the AAR committed a serious error of law in passing the impugned judgment.

(5) CBDT itself, in its circular, having clarified that sub-section (2) is merely an expansion of sub-section (1), it was impermissible for the AAR to take the said factor into account.

(6) From the questions and answers contained in the said circular, it is evident that fringe benefit tax would be applicable on the value of fringe benefit provided or deemed to have been provided to employees based in India and no fringe benefit tax would be payable in respect of an expenditure incurred by the employer for an employee who is not based in India.

(7) The AAR is clearly wrong in holding that the word ‘residence’ would mean only residence in India.

On the other hand, the revenue submitted as under :

(A) Fringe benefit tax is a new concept in terms whereof any consideration for employees provided, inter alia, for facility or amenity comes within the purview thereof;

(B) The tax is payable only when the employer incurs an expenditure delineated in sub-section (2) and such exemption is to be granted only on the tax leviable under sub-section (1);

(C) The terms ‘residence’, ‘transport’, ‘conveyance’, etc., must be given a broad meaning which would lead to the conclusion that only when employees are provided for transport on a regular basis for attending to their work from the place of their residence to the place of work, exemption should be granted; or

(D) The Parliament, in its wisdom, having used the words ‘employees’, journey’, the same would only mean that on any journey undertaken by the employees for regularly attending the works and not on a work on periodic basis.

Held

Fringe benefit tax is a new concept. The tax to be levied on the fringe benefit provided or deemed to have been provided by an employer to employees during the previous year is at the rate of 30 per cent on the value of such fringe benefits. The object for imposition of the said tax, as is evident from the CBDT-circular No. 8 of 2005, dated 29-8-2005, was to bring about an equity. The intention of the Parliament was to tax the employer who, on the one hand, deducts the expenditure for the benefit of the employees including entertainment, etc., and on the other, when the employees getting the perks are to be taxed, on those, who get direct or indirect benefits from the expenditures incurred by the employer, no tax is leviable. It is for bringing about a horizontal equity and not a vertical equity. [Para 12]

Section 115WB (1) contains the interpretation section. It is in two parts. It provides for a direct meaning, as also an expanded meaning. Expanded meaning of the said provision is contained in sub-section (2). Whereas sub-section (1) takes within its sweep any consideration for employment, inter alia, by way of privilege, service, facility or amenity directly or indirectly, sub-section (2) thereof expands the said definition stating as to when the fringe benefit would be deemed to have been provided. The expansive meaning of the said term ‘benefits’ by reason of a legal fiction created also brings within its purview, benefits which would be deemed to have been provided by the employer to his employees during the previous year. Indisputably, sub-section (3) refers to sub-section (1) only. Ex facie, it does not have any application in regard to the matters which have been brought within the purview of the fringe benefit tax by reason of application of the deeming provision. In the instant case, the question for consideration is in regard to grant of exemption in respect of ‘conveyance’ as provided for in clause (F) of sub-section (2) and ‘tour and travel’ which is provided for in clause (Q) of section 115WB(2). [Para 13]

Section 115WA provides for imposition of tax on expenditure incurred by the employer on providing its employees certain benefits. Those benefits, which are directly provided, are contained in section 115WB(1). Some other benefits, however, which the employer provides to the employees by incurring any expenditure or making any payment for the purpose enumerated therein in the course of his business or profession, irrespective of the fact as to whether any such activity would be carried on a regular basis or not, e.g., entertainment, would, by reason of the legal fiction created, also be deemed to have been provided by the employer for the purpose of section 115WB(2). Whereas section 115WB(1) envisages any amount paid to the employee by way of consideration for employment, what would be the limits thereof are only enumerated in section 115WB(2). Therefore, sub-sections (1) and (2) of section 115WB, having regard to the provisions of section 115WA as also sub-section (3) of section115WB, must be held to be operating in different fields. [Para 14]

In the instant case, employees concerned were experts in their field. They were necessarily residents of other country. They were brought to the rig by providing air tickets for their coming from their place of residence to the rig. The employer incurred the said expenditure as of necessity. It, therefore, clearly fell within the purview of the words ‘consideration for employment’. If fringe benefits are provided for consideration for employment, which is given or provided to the employee by way of an amenity, reimbursement or otherwise, clearly, clause (a) of sub-section (1) would be attracted.

A statute, as is well-known, must be read in its entirety. What would be the subject matter of tax is contained in sub-sections (1) and (2). Sub-section (3), therefore, provides for an exemption. There cannot be any doubt or dispute that the latter part of the contents of sub-section (3) must be given its logical meaning. What is sought to be excluded must be held to be included first. If the submission of the revenue is accepted, there would not be any provision for exclusion from payment of tax on any amenity in the nature of free or subsidized transport. [Para 15]

Thus, when the expenditure is 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 therefor are provided by him, the same would come within the purview of the term ‘by way of reimbursement or otherwise’. [Para 16]

It is a well-settled principle of law that a statute should ordinarily be given a purposive construction. [Para 17]

The Parliament, in introducing the concept of fringe benefits, was clear in its mind insofar as on the one hand, it avoided imposition of double taxation, i.e., tax both on the hands of the employees and employers, and on the other, it intended to bring succor to the employers offering some privilege, service, facility or amenity which was otherwise thought to be necessary or expedient. If any other construction is put to sub-sections (1) and (3), the purpose of grant of exemption shall be defeated. If the latter part of sub-section (3) cannot be given any meaning, it will result in an anomaly or absurdity. It is also a well-settled principle of law that the Court shall avoid such constructions which would render a part of the statutory provision otiose or meaningless. [Para 18]

Therefore, the AAR was right in its opinion that the matters enumerated in sub-section (2) of section 115WB are not covered by sub-section (3) thereof, and the amenity in the nature of free or subsidized transport is covered by sub-section (1). [Para 19]

Whether employee concerned should be resident in India - The statute does not say that the employee concerned should be a resident of India. 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. The appellant has a permanent establishment in India. It pays income-tax in India. It carries on business in India. It has, for the purpose of carrying out its business activities, engaged persons from within India or outside India. If it makes any expenditure for bringing any employee from abroad, the same would also liable to be taken into consideration for the purpose of section 115WB(1). [Para 20]

The AAR was not correct in its view in reading the words ‘in India’ after the word ‘residence’ in sub-section (3). [Para 21]

If the reasonings of the AAR were taken to its logical conclusion, the CBDT circular would not be attracted. An employer cannot afford to loose on both the fronts. Its right to claim exemptions either would be in respect of the employees who are based in India or who are not. If the said employees are required to be based in India, section 115WB would not be attracted. However, if such expenditure incurred is found to be as consideration for employment, the same would also bring within its purview the employees who have been hired from outside the country. For the purpose of obtaining the benefit of the said exemption, however, the expenditure must be incurred on the employees directly for the purposes mentioned therein, namely, they are to be provided transport from their residence to the place of work or such place of work to the place of residence. Any expenditure incurred for any other purpose, namely, other than for their transport from their residence to the place of work or from the place of work to the place of residence, would not attract the exemption provision. The assessing authority, therefore, must, in each case, would have a right to scrutinize the claim. The CBDT has the requisite jurisdiction to interpret the provisions of the Act. The interpretation of the CBDT, being in the realm of executive construction, should ordinarily be held to be binding, save and except where it violates any provisions of law or is contrary to any judgment rendered by the Courts. The reason for giving effect to such executive construction is not only same as contemporaneous which would come within the purview of the maxim temporania caste pesto, even in certain situation, a representation made by an authority like Minister presenting the Bill before the Parliament may also be found bound thereby. [Para 22]

Rules of executive construction in a situation of instant nature may also be applied. Where a representation is made by the maker of legislation at the time of introduction of the Bill or construction thereupon is put by the executive upon its coming into force, the same carries a great weight. [Para 23]

Section 115WB must be given its natural meaning. It would, therefore, be difficult to accept the contention of the revenue that the employees must be based in India. [Para 27]

However, the contention that such expenditure should be paid on a regular basis or what would be the effect of the words ‘employees journey’ did not fall for consideration of the AAR. What, therefore, is relevant would be the nature of expenses.

The question as to whether the nature of a travelling expenditure incurred by the appellant would attract the benefits sought to be granted by the statute did not and could not fall for consideration of the AAR. Its opinion was sought for only on one issue. It necessarily had to confine itself to that one and no other. No material in that behalf was brought on record by the parties. Whether the payments were made to them on a regular basis or whether the expenditures incurred would strictly come within the purview of section 115WB or not, must, therefore, be answered having regard to the materials placed on records. If any question arises as to whether the agreement entered into by and between the appellant and the employees concerned would attract, in given cases, the liability under fringe benefit tax, same would have to be determined by the assessing authority. [Para 28]

Case Review

R & B Falcon (A) (P.) Ltd., In re [2007] 159 Taxman 228 (AAR-New Delhi) reversed.