Tax equalisation and payment of tax-free remuneration is a common feature in secondment of expatriates globally. In India, it is almost settled that employee’s obligation to pay tax when discharged by the employer constitutes a perquisite for the employee. The overall salary cost for the employer increases significantly as the tax is required to be paid on a multiple level gross-up.

For companies registered under the Companies Act, 1956 (Cos Act), Section 200 prohibits payment of tax-free remuneration to employees/officers. Despite this prohibition in the Cos Act, the scheme for taxation of perquisites acknowledges tax-free salary payment as a permissible arrangement. Section 10(10CC) of the Income-Tax Act, 1961 (IT Act) overrides Section 200 of the Cos Act and provides the employer an option to pay tax on behalf of employees on non-monetary perquisites and exempts such tax actually paid by the employer in employee’s hands, thus subjecting it only to a single level gross-up.

Whether tax perquisite is ‘monetary’ or ‘non-monetary’ assumed significance and has been a matter of litigation in many cases, including Delhi Special Bench of Tribunal’s decision in case of RBF Rig, Uttarakhand HC in the case of Sedco Forex International Drilling and Delhi HC in case of Yoshio Kubo. While these confirm that the tax perquisite is a non-monetary perquisite eligible for a single level gross-up, it is just a matter of the Supreme Court confirming this position.

The tax clause in the employment contracts seems to be a key indicator in deciding whether it is a case of tax-free remuneration. The prohibition in the Cos Act restricts companies from contractually making tax-free salary payments to expatriates. However, a possible interpretation from the above judicial precedents seems to be that the tax-free salary payment to the employee may not violate provisions of the Cos Act where such payment is made outside of the contractual arrangements.

The much-awaited Companies Act, 2013, seeks to align the Indian law with the global practice as it does not contain provisions similar to Section 200 of the Cos Act. The New Cos Act has been recently enacted partially and Section 200 of