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Tax on tax as a perquisite
December, 22nd 2007

The payment of tax by the company can only be treated as discharge of an obligation of the employee that the latter would have to meet but for the payment by the company.

A Special Bench of the Income-Tax Appellate Tribunal (ITAT) from Delhi has conferred a bonanza on employees whose taxes are borne by the employer. It may be noted that Section 200 of the Companies Act, 1956 bars a company from paying tax-free salary to its employees. Computation of salary income is governed by Section 17 of the Income-Tax Act, 1961. Section 17(2) deals with the calculation of the value of perquisites. It also defines what is meant by perquisites.

Finance Act 2002 introduced Section 10(10CC) with effect from April 1, 2003. The newly inserted sub-clause declares that the tax on the income by way of perquisite actually paid by the employer at the option of the employer on behalf of such employee will be exempt and will not be considered a perquisite by way of monetary payment. This is notwithstanding anything contained in Section 200 of the Companies Act.

In the case of several non-resident foreign nationals working in India, the companies choose to bear the tax on the salary income. Claim was made that such tax as perquisite is not by way of monetary payment to the employee and, therefore, should be exempted. The Department never accepted this contention. According to the Revenue, tax paid by the employer was part of salary and, therefore, tax on tax was not exempt but should be added for computing the total income of the employee.

The view taken was that the employer had made monetary payment in the shape of payment of employees taxes and the nature of perquisite should be considered as monetary only. Hence, the employee was denied the exemption conferred under Section 10(10CC). This view of the Revenue was also upheld by two Benches of the Tribunal in Delhi.

The RBFRC case

The matter was considered by a Special Bench of the Tribunal in RBF Rig Corpn. LIC (RBFRC) vs ACIT, Dehradhun (165 Taxman 101). In this case, the assessees were non-resident foreign nationals, employed in India in the relevant assessment year 2004-05. They were employees of the non-resident company which was treated as statutory agent of the assessee.

As per the terms of employment, the employees were to be paid, salary net of taxes and taxes were to be borne by the employer company. The company filed the returns of the employees in its representative capacity. Tax borne by the employer on the salary paid was added as a perquisite and tax was calculated on the resultant figure.

However, no further tax on tax was claimed to be payable in the light of the provisions of Section 10(10CC). This claim of the assessee and the company was rejected by the assessing officer (AO). He held that tax borne by the employer was a monetary perquisite and, hence, further tax thereon should also be added to the salary by the multiple-stage grossing up process. This action of the AO was contested before the Special Bench.

A detailed treatment

In an elaborate order, the Special Bench considered the amendments made by the Finance Act 2002 when Section 10(10CC) was introduced and changes were made in Sections 40(a)(v), 192(1A) and 195A.

The Notes and Memorandum issued in the Bill had the title Scheme for Taxation of Perquisites Simplified with employer given option to pay tax on behalf of the employees. These changes left no room for doubt that tax paid by the employer on behalf of the employee is a perquisite exempt under Section 10(10CC). For this section to apply, all that is necessary is:

The assessee individual should be deriving income in the nature of a perquisite;

Such perquisite should not be provided by way of monetary payment contemplated under Section 17(2);

Taxes actually paid by an employer at his option on behalf of employee on the above perquisite would not form part of the total income of the employee and should be exempt.

The employer now has the option to pay the taxes on behalf of the employees. The payment of tax by the company can only be treated as discharge of an obligation of the employee which the employee would have to meet but for the payment by the company. This falls under Section 17(2)(iv) of the Act. It cannot be a monetary payment to the employee and will be excluded from computation of total income.

When taxes are paid on behalf of the employee, it is not money that is paid to the employee but it is a discharge of his obligation. It is not a momentary payment to the employee and, hence, taxes paid by the employer can be added only once in the salary of the employer. Tax on such perquisite is not to be added again. This ruling should be helpful to all employees who can negotiate a salary package net of taxes.

T. C. A. Ramanuajm
(The author is a former Chief Commissioner of Income-Tax.)

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