2008 (5) TMI 2 - SC - Income Tax

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.