In a significant ruling by the Authority for Advance Rulings (AAR) titled Singapore Tourism Board v Director of Income Tax-II (International Taxation) Delhi, it was clarified that a foreign company cannot escape its tax liabilities on benefits provided to employees in its India-based liaison offices on the pretext that such income did not arise in India.
The applicant, a company incorporated in Singapore seeking to promote Singapore tourism, had established several liaison offices in India and had employees based in these offices. The company did not carry out any business activities through these liaison offices, no income accrued in India and the expenses relating to the liaison offices were reimbursed by the Singapore office of the company.
The company contended that it was not liable to pay fringe benefit tax in India because its employees generated no income in the country. It argued that the employees of its liaison offices merely worked there and that the expenses relating to the Indian offices were reimbursed from its Singapore headquarters. The applicant also enclosed copies of approvals obtained from the Reserve Bank of India for the establishment of the liaison offices, an audited balance sheet and a statement of income and expenditure.
The Director of Income Tax-II (International Taxation), New Delhi, who was the jurisdictional commissioner in this case, alleged that even though the liaison offices of the applicant did not carry out any business or earn any income in India, the applicant was still liable to pay tax on fringe benefits extended to its employees, by virtue of sub-section 2 of section 115WA and sub-section 2 of section 115WB of the Income Tax Act, 1961.
The AAR explained that fringe benefit tax was introduced through the Finance Act, 2005, which incorporated Chapter XII-H in the Income Tax Act with effect from 1 April 2006. The chapter contains provisions relating to definitions, charges of fringe benefits tax, values of fringe benefits, the filing of returns, assessments, best judgment assessments and advance taxation relating to fringe benefit tax. Employers who pay employees fringe benefits are required to furnish a return of fringe benefits in the prescribed form. Employers are also required to deposit self-assessed tax in advance. The assessing officer is required to analyse the fringe benefits being awarded. If an employer fails to furnish returns, or does not comply with other requirements, the assessing officer is to make a best judgment assessment. This chapter thus acts as a self-contained code on fringe benefit tax.
The AAR referred to the observations in the provisions of law and earlier rulings, declaring that fringe benefit tax liability is in addition to income tax and is subject to separate provisions with regard to returns, assessments and the payment of taxes. Fringe benefit tax is a levy on certain types of expenditure rather than a tax on income. Section 115WA (2) of the Income Tax Act clarifies that even when there is no liability to pay income tax, fringe benefit tax liability may still be attracted.
This ruling is of crucial importance, even if the AAR’s decision applies only to the applicant company, since it sets a precedent for other foreign firms with liaison offices in India.
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