2012 (1) TMI 96 - HC - Income Tax

Fringe Benefit Tax car dealer - levy of FBT on car accessories provided free of cost to the customers Revenue contending it to be sales promotion expenses - Held that - Expenditure incurred on accessories which were supplied to customers who have purchased cars cannot be treated as sale promotion including publicity expenses under clause (D) of Section 115WB(2). Until and unless a customer purchases a car, no accessories are provided or furnished. The customer was not given a largesse but was offered and has managed to get a better deal for the consideration paid. Revenue did not invoke clause (O) to sub-section (2) to Section 115WB. It was not the contention of the Revenue that the accessories given free of cost as gifts. This is rightly so as gifts are given or presented without consideration. Consideration, in the present case is inbuilt as per person/customer is paying consideration for purchase of the car. For gift under clause (O), the same should be paid without consideration. There is no finding to this effect by the Assessing Officer or by the tribunal. - Decided in favor of assessee.

Issues Involved:
1. Liability of Fringe Benefit Tax (FBT) on car accessories provided free of cost to customers.
2. Classification of free car accessories as sales promotion expenses or selling expenses.
3. Interpretation of Section 115WB(2)(B) and Section 115WB(2)(D) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Liability of Fringe Benefit Tax (FBT) on car accessories provided free of cost to customers:

The core issue was whether the appellant, a car dealer, was liable to pay FBT on car accessories provided free of cost to customers. The Revenue argued that such accessories were taxable under Section 115WB(2)(D) as they were provided free of cost to car purchasers.

The court examined Section 115WA, which is the charging section for FBT, stating that tax would be chargeable on fringe benefits provided or deemed to have been provided by employers to their employees. The court noted that the term 'fringe benefits' is defined under Section 115WB, with sub-section (2) incorporating deeming provisions. However, the court observed that customers are not employees and are not deemed to be employees under any provisions of Chapter XIIH. Therefore, the court concluded that providing free car accessories cannot be treated as hospitality provided by the appellant to any person, as it stretches the word 'hospitality' beyond its natural meaning.

2. Classification of free car accessories as sales promotion expenses or selling expenses:

The court considered whether free of cost accessories provided to customers at the time of sale of a car were in the nature of sales promotion expenses or selling expenses. The Assessing Officer had classified the expenditure on free car accessories as hospitality under Section 115WB(2)(B) and added it to the total value of Fringe Benefits. The CIT (Appeals) and the Income Tax Appellate Tribunal upheld this view, stating that the expenditure was in the nature of sales promotion.

However, the court disagreed, stating that the expenditure incurred on accessories supplied to customers who purchased cars could not be treated as sales promotion or publicity expenses under Section 115WB(2)(D). The court emphasized that the customers had paid for the accessories as part of the sale consideration for the car, and the accessories were provided as part of a sales package. Therefore, the court held that the expenditure on free car accessories was akin to providing a discount or rebate and could not be classified as gifts or sales promotion expenses.

3. Interpretation of Section 115WB(2)(B) and Section 115WB(2)(D) of the Income Tax Act, 1961:

The court interpreted Section 115WB(2)(B), which states that hospitality by an employer to any person would be deemed a fringe benefit, and Section 115WB(2)(D), which stipulates that sales promotion, including publicity, are deemed to be fringe benefits. The court referred to dictionary definitions of 'hospitality' and concluded that providing free car accessories does not fall under hospitality.

Regarding sales promotion, the court referred to various judgments, including Smith Kline and French (India) Ltd. vs. CIT and CIT vs. Statesman Ltd., which defined sales promotion as activities to gain goodwill in the market and not limited to media propaganda. The court also referred to the Supreme Court's judgment in ESKAYEF vs. Commissioner of Income Tax, which held that distribution of samples to doctors for prescription drugs was sales promotion.

The court noted that the object and purpose behind FBT and Section 115WB(2)(D) are different from Section 37(3A). The court also considered the CBDT Circular No. 8 of 2005, which clarified that sales discounts or rebates allowed to customers are outside the scope of sales promotion expenses and not liable to FBT. The court concluded that the interpretation suggested by the Revenue was contrary to the interest of customers and public interest.

Conclusion:

The court held that the expenditure on free car accessories provided to customers could not be treated as sales promotion or publicity expenses under Section 115WB(2)(D). The court answered the questions of law in favor of the appellant and against the respondent-Revenue, stating that the interpretation suggested by the Revenue was not the intention of the legislature. Therefore, the appellant was not liable to pay FBT on the free car accessories provided to customers.

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