For an expat working in India, one can see a pattern of salary components as follows:
- Deduction for overseas social security contribution
- Employer pays tax to government authorities and pays net of tax salary to employee
- Employer makes a hypothetical tax deduction in salary in line with its tax equalisation policy
- Employer contributes towards overseas medical insurance and pension schemes
- Employer hires a local consulting firm to help employees file taxes in India and represent its case with the Income Tax Authorities in India
In such cases, there is a strong possibility that the Income Tax Department would want to tax all the above amounts as perquisite in the hands of the employee, going by the plain wordings of Section 15 to 17 of the Act.
However, there have been multiple judgements where various courts in India have discussed various components of such incomes separately and have given favourable decisions in favour of the assessee. But, there is one decision that discusses all these points in one single judgement and can prove to be the frame for reference for the overseas expats and the important thing is that the decision is given by a High Court, as against and ITAT or an AAR ruling, and thus assumes much more weight and credibility.
The decision I am referring to is a 2013 case of Yoshio Kubo v. Commissioner of Income-tax [2013] 36 taxmann.com 1 (Delhi). In this post, I shall take you through the High Court’s view of all of the major issues placed before it, so that you can get an idea on the taxability of those incomes in India.
Overview of tax provisions examined in this case
Let us have a brief overview of the provisions of the Income Tax Act that will apply to the questions put before the High Court:
Section 17(2)(iv):
This section defines the word “perquisites” to include any obligation of employee which is met or settled by the employer. It is a very wide definition that can include the tax payable by employee but paid by employer.
Section (10(10CC):
This is an exemption provision which says that if the tax payable on a non-monetary perquisite given to employee is paid by employer, the tax amount will not be taxed in the hands of the employee.
Section 192 (IA):
This sub-section in Section 192 – TDS on salaries, provides a leeway w.r.t. the tax payable on non-monetary perquisites. It says that an employer can pay tax on the non-monetary perquisites without making any deduction of TDS from employee’s salary.
Section 195A:
This is a section which says that in a case OTHER THAN covered by Section 192(IA) & where under an arrangement or agreement, employer plans to pay tax on the salaries, the income will be grossed up & tax will be calculated on the income including the tax component.
Issues discussed in the case & HC view
Let us now look at the various issues discussed in this case and decision of HC on each of the issues:
Issue #1: Whether income tax paid by employer on behalf of assessee was exempted non-monetary perquisite
Here, the HC has said that the scope of non-monetary perquisite as mentioned in Section 17(2)(iv) and Section 10(10CC) is very wide and squarely includes the a case where the tax obligation of employee is discharged by employer. Hence, the ITD does not have a case to say that this is a “monetary perquisite” and tax paid is liable to be added in income. Hence, the tax paid by employer is not taxable in the hands of the employee.
Issue #2: Whether social security, pension and medical insurance contributions by employer are perquisites
The High Court again stressed on the basic principle laid down by the Hon’ble Supreme Court in the case of CIT v. L.W. Russel AIR 1965 SC 49 thatin order to tax a receipt as salary income, it has to be seen whether the benefit actually vests in the employee. In the case of social security, pension and medical insurance, the benefit does not vest in the employee and it is “contingent” on happening of an unfortunate event. Had there been a case that employee would have purchased an insurance policy and employer was paying for the same, that would have made it a fit case for inclusion as a perquisite u/s 17(2)(iv) and hence taxable however that is not the case here. These payments are involuntary in nature and employee does not have a control – given an option, employee might not have even made these payments. Settled position of law in such cases is that it is a “diversion of income by overriding title” and cannot be construed as an application of income. Hence, these payments are NOT liable to tax in India.
Issue #3: Whether the tax paid by employer will be grossed up u/s 195(IA):
The HC’s answer was NO. Taxe paid by the employer can be added ONLY ONCE in the salary of the employee. Thereafter, tax on such perquisites is not to be added again.
To quote from the HC judgement:
“Whenever tax is deposited in respect of a non-monetary perquisite, the provision of section 10 (10CC) applies, thus excluding multiple stage grossing up. The purpose and intent of introducing the amendment to section 10 (10CC) was to exclude the element of income, which would have arisen otherwise, as a perquisite, and as part of salary. Once that stood excluded, and option was given to the employer under section 192 (1A) to honour the agreement with the employee, Parliament could not have intended its inclusion in any other form, even for the purpose of deduction at source. Doing so would defeat the intent behind section 10 (10CC).”
In its order, the HC also explained this with the help of an example: If the salary of an employee is Rs 100 and the tax liability thereon at the rate of 30% is Rs. 30, in case the employer agrees to bear the tax liability, the total tax to be paid by the employer would be Rs 39 (30% of Rs 130). The grossing up will be only to this level, not further.
Issue #4: Whether TDS refund received in name of employee will be taxable in employee’s hands as a perquisite?
In this case, a refund was paid out in the name of employee which pertained to the excess TDS collected and deposited by the employer. The logic of the ITD was that it is a “disguised perquisite” and hence should be taxed in hands of employee.
The HC, in its Order, said:
“It is clear that the amount was not paid to the employee or due to him, from the employer, according to the terms of the contract governing the relationship. It was paid to the Government, over and above the tax due on the salary. It was not for benefit of the assessee. It never, therefore, bore the characteristic of salary or perquisite. Till assessment was made, the amount could not be refunded to the assessee. The revenue’s position overlooks that all receipts are not taxable receipts. Before a receipt is brought to tax, the nature and character of the receipt in the hands of the recipient has to be considered. Every receipt or monetary advantage or benefit in the hands of its recipient is not taxable unless it is established to be due to him. If the amount is not due, the recipient- in this case, the employee is obliged to pay back the sum to the person, to whom it belongs. A perquisite or such amount, to be taxed, should be received under a legal or equitable claim, even contingent. The receipt of money or property which one is obliged to return or repay to the rightful owner, as in the case of a loan or credit, cannot be taken as a benefit or perquisites. Hence, amounts paid in excess by the employer, and refunded to the employee never belonged to the latter; he cannot be therefore taxed.”
Issue # 5: Whether legal expenses incurred by employer will be taxable as perquisite in hands of employee?
In this case, employer to had paid to Price Water House Coopers towards consultancy fees in respect of tax related matters. The AO asked the assessee why the sum should not be treated as a perquisite; he resisted, saying that the amount was paid to the accountancy firm towards various services; Rs. 90,000/- was paid for preparation of return for three years and the balance was paid towards representation in appeals, rectification, and seeking interim orders, etc. The AO rejected the assessee’s claim reasoning that the assessee had the primary liability to pay tax. He could not get the benefit of tax consultancy fee as expenditure.
The HC, in its Order, said:
The primary liability to pay tax in this case was borne by the employer; it clearly fell within the definition of a non-monetary advantage. That the company, as part of its policy, sought advice from a consultancy firm which was paid for its services. That the benefit of these ultimately enured to the assessee, cannot mean that it formed part of his income as “perquisite”. Here what the revenue seeks to do is to dictate that though part of the payment to the consultant might be justified under the particular circumstances, yet, the expense claimed should be taxed partly as the assessee’s income. The revenue, it is often said, cannot place itself in the armchair of the assessee and determine what he should do to conduct his business. That the assessee was beneficiary to his employer’s policy of consulting tax experts for filing income tax returns as appears to have been the prevailing practice of his employer, in respect of other employees as well, would not transform the expense borne by the employer into income in the assessee’s hands.
Hence, the ITD’s contention was set aside and it was decided that these amounts cannot be taxed in the hands of the employee.
My view on this judgement
In my view, this judgement can really help a lot of overseas expats who work in India and their employers as well. The unique part of this judgement is that the High Court has examined all the issues in a lot of detail, and heard the assessee as well as revenue arguments comprehensively before giving its verdict.
In other words, it gives a lot of weight and credibility to refer to this decision if need be to. Further, since it is a HC decision, it is binding on the lower courts especially the ITAT. This judgement will also allow the human resources teams of overseas employers who have their deputees in India a sense of certainty at the time of building compensation models.
During my research on this subject, I had also analysed some other judgements on these issues, especially foreign social security contributions and below are some favourable judgements that can be additionally relied upon to further strengthen the case of the assessee in such situations:
- Assistant Commissioner of Income-tax *, Circle 48(1), New Delhi v. Erik Matthew Gottesman [2007] 15 SOT 301 (DELHI)
- Gallotti Raoul v. Assistant Commissioner of Income-tax [1997] 61 ITD 453 (MUM.)
- JOINT COMMISSIONER OF INCOME TAX V. T. ADACHI [2006] 100 TTJ 332 (DELHI)
Through this platform, I will also want to request the Central Board of Direct Taxes (CBDT) that a clarificatory circular should be issued to all on-field Assessing Officers so that these issues do not get dragged in unnecessary litigation. This is especially relevant given the fact that more and more expats would be coming to India in near future in light of our Prime Minister’s vision of “Make in India”. If the tax department creates a easier ground for these expats by clarifying on these tax issues, there would be nothing more required.
Hope the post has given you some clarity on these tax issues of expats. For personalised tax advice, you can reach me at contact@abhinavgulechha.com