2020 (1) TMI 1155 - HC - Income Tax

Fringe Benefit Tax - employer-employee relationship - assessment was reopened on the ground that distribution of free samples was in the nature of fringe benefit and therefore, the expenditure incurred by the assessee on the same was includible for the purpose of fringe benefit tax - HELD THAT - For levy of fringe benefit tax, relationship of employer and employees is the sine qua non and the fringe benefits has to be provided by the employer to the employees in the course of such relationship. In Tata Consultancy Services Ltd 2015 (5) TMI 518 - BOMBAY HIGH COURT this Court referred to Circular No. 8/2005 of CBDT which indicated that the objective of taxing perquisite of fringe benefit is both on the ground of equity and economic efficiency. Thereafter, this Court held that the basis of fringe benefit tax is the benefit or perquisite which emanates out of an employer-employee relationship which is a pre-requisite for levy of fringe benefit tax Tribunal recorded as a finding of fact that in the course of its business, assessee distributes free samples to the doctors and others the expenditure for which the assessee claims is not covered within the meaning of sales promotion for the purpose of fringe benefit tax. Tribunal also noted that no case was made out by the Income Tax authorities that the expenditure incurred by the assessee on distribution of free samples to doctors and others involved any employer-employee relationship. Since there was no employer-employee relationship between the assessee on one hand and the doctors on the other hand to whom the free samples were provided, the expenditure incurred for the same cannot be construed as fringe benefits to be brought within the additional tax net by levy of fringe benefit tax - Decided in favour of assessee.

Summary

Issues:
Income tax on fringe benefits - Interpretation of Section 115WA of the Income Tax Act, 1961 - Employer-employee relationship for levy of fringe benefit tax.

Analysis:

Issue 1: Income tax on fringe benefits
The case involved an appeal under Section 260A of the Income Tax Act, 1961 against the order passed by the Income Tax Appellate Tribunal regarding the assessment year 2006-07. The matter pertained to the levy of fringe benefit tax introduced by the Finance Act, 2005. The Act defines fringe benefit tax under Section 115W(b) as tax chargeable under Section 115WA. Section 115WA provides for the charge of fringe benefit tax at the rate of thirty percent on the value of fringe benefits provided by an employer to employees. The essential requirement for the levy of fringe benefit tax is the existence of a relationship between an employer and employees, where fringe benefits are provided by the employer to the employees.

Issue 2: Interpretation of Section 115WA
The case specifically dealt with the interpretation of Section 115WA concerning the levy of fringe benefit tax. The Tribunal referred to a previous decision of the Court in CIT Vs. Tata Consultancy Services Ltd. and emphasized the necessity of establishing an employer-employee relationship as a prerequisite for the levy of fringe benefit tax. The Tribunal upheld the contention of the assessee that the expenditure on free samples distributed to doctors did not involve an employer-employee relationship and thus could not be considered as fringe benefits for the purpose of fringe benefit tax. The Tribunal relied on the judgment in Tata Consultancy Services Ltd. to set aside the order passed by the Assessing Officer regarding the inclusion of the expenditure on free samples for the levy of fringe benefit tax.

Conclusion:
The High Court concurred with the Tribunal's findings, emphasizing that without an employer-employee relationship between the assessee and the recipients of free samples, the expenditure incurred could not be deemed as fringe benefits subject to fringe benefit tax. The Court dismissed the appeal, citing the absence of merit in challenging the Tribunal's decision.