2008 (5) TMI 2 - SC - Income Tax

Statutory explanation altering 'earned in India' not retrospective; Section 115WB read naturally; transport costs not automatically FBT liability

SC held that the statutory explanation purporting to alter the meaning of 'earned in India' cannot be given retrospective effect and Section 115WB must be ... Scope of exemptions under sub-section (3) of Section 115WB - imposition of tax on 'fringe benefits' - Whether transportation cost incurred by the petitioner 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 - HELD THAT:- It was categorically held that as the explanation sought to give an artificial meaning to 'earned in India' and brings about a change effectively in the existing law, it should not be held to have any retrospective operation. Section 115WB does not contain such a provision. It must, therefore, be given its natural meaning. It would, therefore, be difficult to accept the contention of the learned Solicitor General that the employees must be based in India. It appears that 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 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 this behalf was brought on record by the parties. Whether the payments were made to them on a regular basis or whether the expenditures incurred which 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 FBT benefit tax would have, thus, to be determined by the assessing authority. The appeal is allowed to the aforementioned extent and with the aforementioned observations. In the facts and circumstances of this case, there shall be no order as to costs. Issues Involved:1. Interpretation and application of Section 115WB of the Income Tax Act, 1961.2. Liability of the appellant to pay Fringe Benefit Tax (FBT) on transportation costs for offshore employees.3. Scope of exemptions under sub-section (3) of Section 115WB.4. Applicability of FBT to employees based outside India.5. The role of Central Board of Direct Tax (CBDT) circulars in interpreting FBT provisions.Issue-wise Detailed Analysis:1. Interpretation and Application of Section 115WB of the Income Tax Act, 1961:The case revolves around the interpretation of Section 115WB, which defines 'fringe benefits' and the imposition of FBT. Section 115WA(1) imposes FBT at 30% on the value of fringe benefits provided or deemed to have been provided by an employer. Section 115WB(1) lists direct provisions of fringe benefits, while Section 115WB(2) expands this through a deeming provision. Sub-section (3) of Section 115WB provides exemptions but is explicitly linked to sub-section (1).2. Liability of the Appellant to Pay Fringe Benefit Tax on Transportation Costs for Offshore Employees:The appellant, an Australian company providing Mobile Offshore Drilling Rig (MODR) services, questioned whether transportation costs for moving offshore employees from their residence in their home country to the place of work and back are liable to FBT. The AAR ruled that the company is liable for FBT on these transportation costs, interpreting that sub-section (3) of Section 115WB does not apply to the deeming provisions of sub-section (2).3. Scope of Exemptions under Sub-section (3) of Section 115WB:The appellant argued that sub-section (3) should cover both sub-sections (1) and (2) of Section 115WB. The court examined whether the exemption for 'free or subsidized transport' in sub-section (3) applies to the benefits deemed provided under sub-section (2). The court concluded that sub-sections (1) and (2) operate in different fields, and sub-section (3) only applies to sub-section (1), thus not extending the exemption to the deemed provisions under sub-section (2).4. Applicability of FBT to Employees Based Outside India:The court addressed whether the term 'residence' in sub-section (3) should be restricted to India. It held that the statute does not limit 'residence' to India, and FBT applies to expenditures incurred for employees regardless of their residence. Therefore, the AAR erred in interpreting 'residence' to mean only residence in India.5. The Role of CBDT Circulars in Interpreting FBT Provisions:The court considered the CBDT circulars, which clarified that sub-section (2) is an expansive definition of sub-section (1). The circulars indicated that FBT applies to employees based in India, but the court noted that this does not exclude employees based outside India from FBT liability. The court emphasized that CBDT interpretations should be binding unless they violate legal provisions or court judgments.Conclusion:The Supreme Court allowed the appeal to the extent that the AAR's interpretation of 'residence' as limited to India was incorrect. It affirmed that the exemptions under sub-section (3) of Section 115WB do not apply to the deeming provisions of sub-section (2). The court directed that the nature of the expenses and their regularity should be scrutinized by the assessing authority to determine FBT liability. The appeal was allowed with no order as to costs.