The Law The Procedure Issues over Cross Border Transaction

1. The Law • The Procedure • Issues over Cross Border Transaction FRINGE BENEFIT TAX PRESENTED BY – CA. HARIRAM GILDA

2. ROAD MAP • Introduction • Pre- requisites for FBT • FBT Provisions- Direct & Deemed Benefits • FBT on Cross Border Transaction • Tax Compliance • Binding Nature of Circulars

3. INTRODUCTION • Tax on Expenses and Not on Income • Tax on Employer and Not on Employee • Additional Tax on Employer • Presumptive Taxation • Not a Deductible Expenditure • No Threshold Exemptions • Chargeable even if no Income-tax is payable by an employer on his total income • Rate is 30% on the Value of fringe benefit as increased by Surcharge & Cess

4. PRE-REQUISITE FOR FBT • Must be an Employer being a Company or a Firm or an AOP or a BOI or a Local authority or an Artificial Juridical Person • Employees based in India • Employer – Employee Relationship • Employer income is not exempt u/s 10 (23C) or is not registered u/s 12AA • Fringe benefits of clause (a) to (d) of sub section (1) of section 115WB have been provided by the Employer • During the course of his business or profession, incurred any expense on or made payment of clauses (A) to (Q) of sub section (2) of Section 115WB

5. FBT – THE CONCEPT Direct Benefits 100% of the Expenditure Fringe Benefit Deemed Benefits 50% / 20% / 5% of the Expenditure DIRECT BENEFITS –COVERED U/S 115WB(1) • Any privilege, service, facility or amenity whether provided directly or indirectly, or whether by way of reimbursement or otherwise to employees • No basis of valuation provided • Free / concessional ticket for private journey of employees or their family members • Employer’s contribution to approved Superannuation Fund • Exempt upto the limit of 1,00,000 • Any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to employees

6. FBT ON ESOP : MEANING OF SPECIFIED SECURITY/SWEAT EQUITY • “Specified Security” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) [and, where the employees’ stock option has been granted under any plan or scheme thereof, includes the securities offered under such plan or scheme] • “Sweat Equity Shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

7. FBT ON ESOP – TERMINOLOGY • Option Right but not an obligation given to the Employee to purchase the shares offered by the Company at a future date and a predetermined price. • Grant Date Date on which the benefits under the scheme are extended to the Employee • Vesting Date Date on which the Employee gets control to exercise his option • Exercise Date Date on which the employee exercises his options • Grant / Exercise / Strike Price Price communicated to the Employees at the time of Granting the Option

8. FBT ON ESOP – ON WHOM CHARGABLE Indian Co. Foreign Co. Employee based in India Employee based in India for part of the year Employee based in India for Part or whole of grant period Employee based outside India Chargeable to FBT Charge proportional to stay in India during grant period Charge proportional to stay in India during grant period No Charge If no stay in India during grant period Qs. 5 of Circular 9/2007, contrary to Qs. 31 of Circular 8/2005

9. DEEMED BENEFITS – COVERED U/S 115WB(2)

10. ENTERTAINMENT • Meaning & Scope of Entertainment: “Expenses in connection with Exhibition, performance, amusement, game or Sport, for affording some sort of amusement or gratification” ------- Q No. 49 of CBDT Circular No. 8/2005 • Some Issues on Entertainment - • Company incurs capital exp. for staff/guest ie. Coffee machine, refrigerator, is this entertainment exp.? ------- Q. No. 89 of CBDT Circular No. 8

11. HOSPITALITY • Scope: • Provision of hospitality of every kind by the employer to any person is covered • Food & beverages provided to customers, clients, agents , distributors shall be covered by Hospitality • Reimbursement of food Expenses to Employees (Qs.No. 52) • Specific Exclusion: • Food & beverages to employees at office or factory • Any expenditure or payment through non-transferable paid vouchers, used at eating joints or outlets.( No limit on amounts of vouchers) • Some Issues: • Purposes refers to proximate purpose and not the distant purpose. (Q.No.11) • The words ‘or in any other manner whatsoever’ is of very wide important. • Exp. of Food or beverages at training centre is exempt from FBT – (Qs.No. 50)

12. CONFERENCE • Scope: • Any expenditure on or payment for conference or any expenditure on conveyance, tour and travel (including foreign travel), on hotel, or boarding and lodging in connection with any conference • Specific exclusion - • Participation Fee paid for the employees – (Qs .No. 55) • Press conference • Business convention • Some Issues - • Expenses in respect of conferences organized by trade body or institutions internally attract fringe benefit tax. (Qs. No. 54) • AGM - Statutory requirement

13. SALES PROMOTION & PUBLICITY • Meaning : “sales promotion is an activity which will promote the sales of the assessee by reason of the advertisement and publicity that will be attendant on it or by reason of the incentives or other attractions offered to attract customers for the assessee products.” .....CIT v. Popular Automobiles Ltd. [1995] 212 ITR 611 (Ker.) • Scope: Any expenditure incurred on or payment for sales promotion including publicity. • Specific exclusion • Advertisement in any print mode /electronic media / transport system • Holding or participating in any press conference / business convention / fair / exhibition • Sponsorship of sports / other events organized by govt. agency / trade association/body • Publication in any print or electronic media of any statutory notice • Advertising by way of signs / banners / hoarding/ artwork etc • Payments made to any advertisement agency for the above mentioned purposes • Distribution of samples (free/concessional) • Payment to any person of repute for prompting sales

14. SALES PROMOTION & PUBLICITY … • Selling expenses are not ‘Sales Promotion Expenses • Commission to selling Agents ...(Q.No.58) • Incentive for quantity targets to distributors …(Q.No.61) • Some Issues : • Does a gift to customer fall under ‘sales promotion’ or ‘gift’? …(Q.No.98) • Free offer with freebies with product is for sales promotion & liable for FBT (Qs. No. 66) • Distribution of T-shirts & Cap with company’s logo • Calendar, Panchage & Diary with details of company’s product.

15. EMPLOYEES’ WELFARE • Dictionary Meaning : “Employee’s Welfare means the health, happiness and fortunes of a person or a group”. • Scope : • Books & Periodical …(Q. No.75) • Uniform / safety shoes …(Q. No.74) • Prize / Reward …(Q. No.76) • Medical reimbursement …(Q. No.69) • Upto Rs.15,000 - covered • Exceeding Rs.15,000 – not covered • Approved Gratuity fund and ProvidentFund …(Q.No. 38) • Group Personal Accident / Group Health Insurance …(Q.No.68 & 70) Workman’s Compensation Insurance and Group Personal Accident Insurance, to protect the employee company’s interest & not to protect the employee, therefore not tantamount to ‘Employee Welfare’ ……CIT v. Lala Shri Dhar [1972] 84 ITR 192 (Delhi) • Exp on meeting get together of employees & their family on non festival occasion (Qs. No. 95)

16. EMPLOYEES’ WELFARE … • Specific exclusion : • Fulfill any statutory obligation • Mitigate occupational hazards • Provide first aid facilities in the hospital run by the employer (Q. No.71) • Provide crèche facility for the children of employee • Organise sports events for employees • Specific Expenses like Food & Beverages, Festival celebration, Use of Health club, Gift, Scholarship to be considered in relevant head

17. CONVEYANCE • Dictionary Meaning: Conveyance means “ means of transport” Transport means “carry people or goods from one place to another by means of a vehicle, aircraft or ship” • Scope: • Rent on hiring of motor car …(Q.No.82) • Transport facility to children of employee …(Q. No.77) • Reimbursement of car expenses & driver’s salary …(Q. NO. 78) • Reimbursement of expenses from client – who has to pay FBT ? …(Q. No. 12& 13) • Exclusions: • Free or Subsidized transport for journey to employees from their residence to place of work or vice-versa • Conveyance allowance to employees …(Q. No.47) • LTA …(Q. No. 44)

18. HOTEL, BOARDING & LODGING FACILITIES • Meaning: • Hotel means “ an establishment providing accommodation and meals for travellers and tourists ” • Boarding means “ receive meals and accommodation in return for payment ” • Lodging means “temporary accommodation” • Scope: • Hotel stay expense etc. in relation to customer/client (Q.No. 67) • Daily allowance to employees (Q.No.79) • Reimbursement of Hotel, Boarding & Lodging exp. to professional like lawyer or auditor, who will pay FBT? (Q. No. 13)

19. REPAIRS, RUNNING, MAINTENANCE OF MOTOR CAR • Meaning of Motor Car : “Motor-car’ means any motor vehicle other than a transport vehicle, omnibus, road-roller, tractor, motor cycle or invalid carriage” ……Motor Vehicles Act, 1988 • Distinction between Motor Car & Motor Vehicles? • Motor car includes: • Jeep [EID Parry India Ltd V. CIT 243 ITR 116 (Mad.)] • Metadore [Panchmahal steel ltd. V. CIT 81 Taxman 58 (Ahd.)] • Motor Car Excludes: • Delivery van , truck, ambulance, tractor (Q. No.85) • Scope: • Repairs • Running (including fuel) • Maintenance of motor car/Aircraft • Amount of depreciation thereon. • Rent for garage (Q. No.88) • Interest on Loan (Q. No.84)

20. REPAIRS, RUNNING, MAINTENANCE OF MOTOR CAR … • Some Issues - • Rent paid or payable for hiring or leasing of a motor car (Q. No. 82) • Operating lease • Finance lease • Brown Boveri Ltd. V. IFCI Ltd. [2004] 56 SCL 21 (SC) “…Finance lease has been defined by International Accounting Standards Committee as ‘ a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred.’ Lessor is only a financier and is not interested in the assets. • Contrary to scheme of FBT (Includible in sec.17 & Contrary to Q. No. 44,47, 69 & 82) • Salary to driver of motor car (Q. No. 87) • If employer engaged in the business of carriage of passenger or goods by motor car, but give some motor car on lease then concessional rate will be applicable? • Perquisite value of car provided by employer (Q. No.81)

21. TELEPHONE (INCL MOBILE) • Scope : • Telephone installed in the office in name of the company. • Exclusion : • Expenditure on leased telephone line The term leased line is a general description of a point to point circuit from a data carrier supplier. A leased line is not connected to a telephone exchange & does not provide DC power, dial tone, busy tone or ring signal. • Location of telephone installed &mode of payment is irrelevant. (Q.No.90) • Some Issues - • Fixed telephone allowance per month paid to Employees

22. GUEST HOUSE • Meaning: • Not defined u/s 115 WB (2)(K) • Whether all guest house are liable for FBT? (Q.No. 93) • Scope: • Maintenance of any accommodation in the nature of guest house other than accommodation used for training purposes • Normal maintenance expenses • Provision of food • Contract charges paid in respect of services at guest house, cable charges /Internet charges etc. • Capital expenses like refrigerator, T.V.(Q.No.91) • Rent for guest house (Q.No. 92) • Depreciation on guest house building (Q.No. 94) Note : This clause is omitted w.e.f. 1/04/2009

23. HEALTH CLUB & SIMILAR FACILITIES • Meaning: • Section 65(52) of Finance Act,1994 “Health club and fitness centre” means any establishment, including a hotel or resort, providing health and fitness services. • Section 65(51) of Finance Act,1994 “Health & fitness service” means service for physical well being such as sauna and steam bath, Turkish bath, solarium , spas, reducing or slimming saloons, gymnasium, yoga, meditation, massage (excluding therapeutic massage ) or any like service” • Similar facilities includes - Fitness centre, Health saloons , Gymnasium, Massage centre, Slimming centre, Aerobics centre • Scope: • Payment made to whom is not relevant • Exclusion: • Depreciation of health club building

24. HEALTH CLUB & SIMILAR FACILITIES … • Some Issues: • ‘Sports facilities’ can be covered under the ambit of ‘& similar facilities’? • Reimbursement of health club expenses of employees (bills are issued in the name of employees), liable to FBT? • Employer incurred expenses on the maintenance of health club & similar facilities, will be covered under this clause? • Entrance & Memberships fees of the club (Q.No.96)

25. GIFTS • Meaning of ‘Gift’: Section 2(xii) of the Gift –tax Act, 1958 ‘Gift’ means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section. • Issues: • Gift V. Advertisement • Articles presented or gifted carry the company’s name or logo, it would be ‘advertisement’ rather than ‘gifts’. CIT v. Allana Sons (P.) Ltd. [1995] 216 ITR 690 (Bom.) CIT v. West Coast Paper Mills Ltd. [2001] 250 ITR 506 (Bom.) • Gift to distributors/retailers under trade schemes (Q.No. 97) • Gift to customer for the purpose of sales promotion (Q. No. 98) • Gift on the occasion of marriage of employees (Q. No. 99) • Lucky draw

26. FESTIVAL CELEBRATION SCHOLARSHIPS TOUR & TRAVEL (INCL. FOREIGN TRAVEL) • Includes – meeting/get-together of employees and their family members on the occasion of any festival (eg. Christmas new year) • Excludes - Expenses on Independence Day & Republic Day (Q. No.95) • w.e.f 1/4/2009, rate is reduced to 20% from 50% • Includes – education of employees sent to an educational institution • Includes – Expenses incurred on outstation travel • Excludes – Expense incurred by a professional like a lawyer or auditor and reimbursed as out-of-pocket expenses REPAIRS, RUNNING, MAINTENANCE OF AIRCRAFT

27. FBT ON CROSS BORDER TRANSACTIONS • Scope: • Applicability of FBT to Foreign Companies …(Qs. No. 22) • Liaison Office in India …(Qs. No. 26) • Foreign company has Permanent Establishment in India incurs expenses outside India attributable to operations in India …(Qs. No. 27) • If Foreign Company deputs personnel to India for Short duration ….(Qs. No. 30) • FBT payable by foreign company if employee are not taxable in terms of dependent personnel service ….(Qs. No. 31) • Issues: • Meaning of employees based in India • Employees taxable in India • Employees staying in India for long duration • Employees resident in India • Employees rendering services in India “A man base is the place where he should be regarded as ordinarily working, even though he may spend days, weeks or months working overseas” – Todd v. British Midland Airway

28. OTHER IMPORTANT INFORMATION • No segregation of expenses incurred on employees or others • Capital or Revenue Expenditure • Pre-operative Expense • Net expenses to be considered in case of recovery from employees • Cost Sharing agreement with group companies (Qs.No.33) • Disallowance u/s-37 (Qs.No.35) • Bogus Expenditure • Accounting Records • FBT deductible for computing Book Profits-[115JB](Qs. No. 103) • The employer can recover the FBT paid on ESOP from the employee u/s 115WKA

29. OTHER IMPORTANT INFORMATION … • Meaning of the term business of construction – “ All activities refereed to in section 115WC- covered”- Qs. No. 106 • Meaning of the term Computer Software – “ Assume its natural meaning i.e., recording of programmes on any disc, tape or perforated media or other information storage device” – ITES Excluded – Qs. No. 105 • Basis of allocating common expenditure in case of an employer having multiple businesses – FBT payable Qua Employer – Expenditure attributed to various businesses on the basis of share of expenditure on wages & salaries in the total Expenditure in all businesses. Qs. No. 41

30. TAX COMPLIANCE • Advance Tax: • Filing of Return: Similar to that of tax on income

31. BINDING NATURE OF CIRCULARS ISSUED BY CBDT • The legal and binding nature of the circulars issued by the CBDT under section 119 of the Income-tax Act has been examined by the supreme court in the case of UCO Bank v. CIT [237 ITR 889] • Such circulars even though granting benefit beyond the provisions of the law are binding on the Officer of the Tax Dept. • Circulars, which are adverse to the assessee, are not binding on the assessee and he can take a view as per the provisions of the law. • Circulars though can be used as aid to interpretation of statue or to understand the intent of the Government, it cannot interpret the law and therefore, are not required to be followed by the tribunal or the courts while interpreting the law. • The Circulars cannot override judicial decisions rendered on the statute