2017 (1) TMI 1701 - AT - Income Tax

Tribunal excludes value of free samples from FBT assessment, stresses employer-employee relationship

The Tribunal allowed the appeal, setting aside the inclusion of the value of free samples for Fringe Benefit Tax assessment. Relying on a Bombay High ... Sales promotion for the purposes of FBT - Initiating proceeding u/s 115WG / 115WH - value of free samples of medical formulation distributed to doctors and others has escaped assessment in the FBT - HELD THAT:- Order to justify the levy of FBT, establishing of employer-employee relationship is a pre-requisite. In the present case, no case has been made out by the income-tax authorities that the expenditure incurred by assessee on distribution of free samples to Doctors and others involved any employer-employee relationship between the assessee and the recipients of such samples. Therefore, at the very threshold, following the ratio of judgment of the Hon'ble Bombay High Court in the case of Tata Consultancy Services Ltd. [2015 (5) TMI 518 - BOMBAY HIGH COURT] action of Assessing Officer is untenable and is hereby set-aside. Thus, assessee succeeds on its plea. Issues:1. Validity of initiating proceedings under sections 115WG and 115WH of the Income Tax Act.2. Inclusion of the value of free samples for charging Fringe Benefit Tax (FBT).3. Interpretation of expenditure on distribution of free samples as sales promotion for FBT purposes.4. Applicability of legal precedents in determining the nature of expenses for FBT assessment.Issue 1: Validity of initiating proceedings under sections 115WG and 115WH of the Income Tax Act:The appeal challenged the initiation of proceedings under sections 115WG and 115WH of the Income Tax Act, arguing that it was illegal due to being based on a mere change of opinion. However, the Tribunal did not find this argument tenable and proceeded to analyze the substantive dispute regarding the inclusion of the value of free samples for FBT assessment.Issue 2: Inclusion of the value of free samples for charging Fringe Benefit Tax (FBT):The core dispute revolved around the Assessing Officer including a sum representing free samples distributed for charging FBT, which the assessee contested. The Tribunal noted that the original return of FBT disclosed a value, which was accepted in an earlier assessment. Subsequently, the assessment was reopened based on the argument that the expenditure on free samples was in the nature of sales promotion, thus liable for FBT inclusion. The Tribunal ultimately ruled in favor of the assessee, setting aside the Assessing Officer's action.Issue 3: Interpretation of expenditure on distribution of free samples as sales promotion for FBT purposes:The Tribunal examined the nature of the expenditure on free samples distributed by the pharmaceutical company, determining whether it fell under the category of sales promotion for FBT assessment. The Assessing Officer relied on legal precedents, including a Supreme Court judgment, to support the inclusion of free samples for FBT. However, the Tribunal referred to a Bombay High Court judgment in a similar case involving technical consultancy services, where the court held that the expenditure in question was not includible for FBT purposes. Based on this precedent, the Tribunal found the Assessing Officer's action untenable and ruled in favor of the assessee.Issue 4: Applicability of legal precedents in determining the nature of expenses for FBT assessment:The Tribunal extensively analyzed the legal precedents cited by both parties to determine the nature of expenses for FBT assessment. While the Assessing Officer relied on a Supreme Court judgment to support the inclusion of free samples for FBT, the Tribunal found the Bombay High Court judgment in a similar case more applicable. The Tribunal emphasized the importance of establishing an employer-employee relationship to justify the levy of FBT, which was lacking in the case of free samples distribution. Consequently, the Tribunal set aside the Assessing Officer's action based on the legal precedent provided by the Bombay High Court judgment.In conclusion, the Tribunal allowed the appeal of the assessee, setting aside the inclusion of the value of free samples for FBT assessment based on the legal precedent established by the Bombay High Court judgment. The Tribunal's decision highlighted the importance of legal precedents in interpreting the nature of expenses for FBT assessment and emphasized the need to establish an employer-employee relationship to justify the levy of FBT.