2013 (5) TMI 713 - AT - Income Tax

Charge of fringe benefit tax - whether a person is a servant or an agent - assessee pleaded that the employer is a Foreign Company registered in United States of America (USA) having a project office in India in respect of carrying out exploration of mineral oils which was granted vide a Production Sharing Contract (PSC) with the Government of India - Held that - Examinaing the terms and conditions in the present case under which these consultants have been hired by the assessee. Once this is an admitted fact then the consequence is that the Revenue Department has collected the tax with the understanding that the persons in question were in fact not the employee. Since tax had not been deducted u/s.192 of the Act i.e. TDS on salary. Had it been that the persons engaged were employees of the assessee then the TDS was supposed to be deducted u/s.192. Apart from this the persons engaged were not granted any retirement benefit which otherwise is available to an employee. Further those persons were not given any gratuity or superannuation benefit nor they were provided either leave encashment or rent-free accommodation. Since those services were professional services therefore accordingly the fees was paid. So the FBT is eligible only in a case where expenditure is incurred by the employer ostensibly for the purpose of business but includes partially a benefit of a personal nature passed on to the employee. But a legitimate business expenditure not within the ambits of employer & employee relationship is outside the scope of FBT. In view of these observations we hereby hold that the FBT provisions have wrongly been invoked in the present case. We hereby reverse the legal findings of the authorities below and direct the AO to give relief accordingly. In favour of assessee.

Issues Involved:
1. Erroneous order by CIT(A).
2. Liability of Fringe Benefit Tax (FBT) despite no employees.
3. Master-servant relationship between appellant and consultants.
4. Ignoring CBDT Circular No.8 of 2005.
5. Liability of FBT due to expenses under section 115W without employees.
6. Deletion of specific business expenditures from FBT.

Detailed Analysis:

1. Erroneous order by CIT(A):
The appellant argued that the order passed by CIT(A) was erroneous and required modification. The Tribunal examined the facts and legal arguments presented by both parties, ultimately finding in favor of the appellant.

2. Liability of Fringe Benefit Tax (FBT) despite no employees:
The appellant contended that they were not liable for FBT as they did not have any employees in India during the relevant assessment year. The Tribunal noted that the appellant, a Non-Resident Company, was engaged in providing consultancy for crude oil and gas production and had declared the value of "Fringe Benefits" as NIL. The AO, however, computed the value of fringe benefits at Rs.16,16,663/- and charged 30% tax on it. The Tribunal found that the AO's decision was based on an incorrect presumption of an employer-employee relationship.

3. Master-servant relationship between appellant and consultants:
The AO had concluded that the relationship between the appellant and the consultants was that of employer-employee based on the terms of the retainership agreements, which included monthly payments, reporting requirements, and conditions of discipline. The Tribunal, however, found that these conditions did not necessarily indicate an employer-employee relationship. It emphasized that the consultants were engaged on a retainership basis and were assessed under "income from business and profession," not as employees.

4. Ignoring CBDT Circular No.8 of 2005:
The appellant argued that the CIT(A) ignored the clarification issued by the Central Board of Direct Taxes (CBDT) vide Circular No.8 of 2005, which necessitates establishing an employer-employee relationship to levy FBT. The Tribunal agreed with the appellant, stating that the AO and CIT(A) failed to appreciate the spirit behind the enactment of the FBT provisions, which was to tax personal expenses and perks afforded by the employer to employees.

5. Liability of FBT due to expenses under section 115W without employees:
The Tribunal examined whether the expenses incurred by the appellant, such as conveyance, tours & travels, telephone and mobile expenses, guest house expenses, and club membership fees, could be considered fringe benefits in the absence of an employer-employee relationship. The Tribunal concluded that these expenses were legitimate business expenditures and not fringe benefits, thereby reversing the findings of the AO and CIT(A).

6. Deletion of specific business expenditures from FBT:
The appellant contended that specific expenditures like traveling & conveyance, telephone & mobile expenses, guest house expenses, insurance expenses, entertainment expenses, and club membership fees should not be considered fringe benefits. The Tribunal agreed, stating that these expenditures were legitimate business expenses and should not be taxed as fringe benefits.

Conclusion:
The Tribunal allowed the appeal, concluding that the FBT provisions had been wrongly invoked in this case. It directed the AO to provide relief to the appellant, emphasizing that there was no employer-employee relationship and that the expenditures in question were legitimate business expenses, not fringe benefits.

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