Authority For Advance Rulings (Income Tax), New Delhi
Royal Bank Of Scotland, In Re
Section : 10(13), 192
Justice Dr. Arijit Pasayat, Chairman
And T.B.C. Rozara, Member
A.A.R. No. 964 Of 2010
May 9, 2014
1. The applicant has filed this application for obtaining an advance ruling u/s. 245Q(1) of the Income-tax Act, 1961 (in short “the Act”).
2. The factual position highlighted by the applicant is as follows:
The Applicant is a Bank incorporated in Netherlands with limited liability and it has branches in India. The Indian branch of the Applicant constitutes a permanent establishment (‘PE’) in India as per Article 5 of the Double Taxation Avoidance Agreement between India and the Netherlands, (which is referred hereinafter as the Treaty).
The Indian branch of the Applicant has established a superannuation scheme (‘the Scheme’) for the purpose of providing pension to its eligible employees. The aforesaid Scheme, which is a defined benefit plan has been approved by the Commissioner of Income-Tax under Rule 2(1) of the Part B of the Fourth Schedule of the Act, on 26 December 1975. Employees who have joined the Applicant up to 31 December 2004 are eligible for the pension benefit under the aforesaid Scheme. Employees, who have completed 10 years of continuous services, are eligible for pension on resignation/ retirement.
Superannuation schemes adopted by various enterprise are categorized as “defined contribution schemes” and “defined benefit schemes”. Both these types of superannuation schemes are provided by various insurance companies.
Accounting Standard 15 (‘AS-15’) on Employee Benefits issued by the Institute of Chartered Accountants of India which provides the accounting treatment for employment benefits defines the “defined contribution scheme” and “defined benefit scheme” as follows:
Defined contribution scheme
AS-15 defines ‘defined contribution schemes’ as post-employment benefit plans, under which an enterprise pays fixed contributions into a fund and has no obligation to pay further contributions, if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
Defined benefit Scheme
As per AS-15, a defined benefit scheme should be a plan in which the benefits to be received upon retirement are clearly defined in the rules of the scheme. The amount of contribution is invested in order to earn some returns. But irrespective of the kind of returns generated by the investment, the employees are assured of their pensions as per the pre-defined formula, which means that the risk of generating enough return lies with the employer.
Further, AS-15 also states that accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. In addition, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service. The actuarial valuation is typically based on several actuarial factors such as discounting rate, salary escalation rate, attrition rate, average mortality rate, etc., in order to provide for the future liabilities that could arise to the applicant out of the aforesaid scheme. It may be pertinent to note that the aforesaid actuarial factors are variable in nature, and may change from year to year for the same enterprise.
In the Applicant’s case, a lump sum contribution is made into the Scheme in respect of the pension for all eligible employees. The lump sum contribution is calculated based on the actuarial valuation which is in turn typically based on several underlying assumptions. Given the nature of the defined benefit scheme, it is not possible to derive the contribution on a per employee basis which may be used for income-tax purposes.
3. The questions on which the ruling is sought read as follows:
“(1) Whether on the facts and circumstances of the case and law, tax is required to be deducted at source under section 192 of the Act, by the Applicant on the contribution to the superannuation fund (for an amount exceeding one lakh rupees per employee) as perquisite and where the same is not so deducted, whether the Applicant would be treated as a ‘assessee in default’?
(2) If the answer to question 1 is yes, where the Applicant was to bear income- tax on behalf of the employees, whether the tax so borne by the Applicant should be taxed again in the hands of the employees and the grossing up provision as applicable under Section 195A of the Act should be applicable?”
4. Elaborating the factual position the applicant has stated as follows:
Actuarial valuation report does not have employee wise detail of contribution.
In the present case, the Applicant makes a single contribution to the superannuation fund for all its employees taken together, based on the actuarial valuation provided by the actuarial valuer for a period of time, and the same is not identifiable to any particular employee. In respect of such a ‘single’ contribution made under the ‘Defined Benefit Scheme’ (as distinct from the contribution made under the ‘Defined Contribution Scheme’), details of the contribution pertaining to each employee are not available in the Actuarial Valuation Report provided by the Actuary to the Applicant. The same is evident from the Actuarial Valuation Report issued by M/s Towers Watson, an independent actuarial valuer, for the financial year ended 31 March 2012, A copy of the same has been submitted.
On perusal of the said valuation report and tables attached to the same (viz. disclosure of total employer expense for the year, Net Assets/ Liabilities recognized in the Balance Sheet as on the first and last day of the financial year and statement of change in obligation and assets over the financial year, etc.) , the said contribution under the defined benefit scheme is calculated for the entire organization as a whole and not qua any specific employee of the organization.
Thus, the said contribution is not on behalf of any individual employee nor does the same represent an amount available in any account for any single employee. The contribution to the ‘Defined Benefit Scheme’ is basically a lump sum amount calculated based on the actuarial valuation, which is, in turn, typically based on several underlying assumptions (e.g. mortality rate, etc). Even this ‘single’ contribution recommended by any one actuary based on the actuarial assumptions as per his professional judgment, may not be the same if recommended by another actuary, based on his own professional judgment and skill.
There could be a scenario where the assets of the Scheme may be in surplus over its obligations, as per the actuarial valuation, due to various factors viz. reduction in the number of employees on the payroll of the Applicant on the last day of the financial year vis-Ã -vis first day of that year, etc. Accordingly, the Applicant may not be required to contribute for that particular year. Likewise, in subsequent year, there could be a scenario where the obligations/ liabilities of the Scheme as per the actuarial valuation are higher than its assets and hence, Applicant would be required to contribute to the Scheme in that particular year.
The actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the enterprise. If actuarial or investment experiences are worse than expected, the employer’s obligation may increase.
In view of the above, it is apparent that the contribution paid by the Applicant is mainly made up of two components, firstly to meet the cost of the accruing benefits during the year and secondly, an adjustment for any deficit or surplus in the scheme at the time for the past year(s).
Accordingly, in view of the above arguments and given the nature of the ‘Defined Benefit Scheme’, it is not possible to derive the contribution on a per employees basis which may be used for incomeâtax purposes
5. In response the Revenue has submitted inter-alia as follows:
The Indian Branch of the above mentioned Non-resident assessee has established a superannuation scheme for providing pension to its eligible employees. As stated by the assesseee in its application, the superannuation scheme is a ‘defined benefit plan’. The assessee’s contention is that the actual contribution in respect of an employee is not discernible in this case for the purpose of section 192(1A) of the Act. The assessee has not indicated in its application whether any of the employees to whom such benefits would be provided are non-residents. It is further seen that the issues involved in this case relate to Section 192 (1A) and Section 195A of the Act. The issues relevant in this case involve matters relating to ‘defined benefit plan’ that would fall within the purview of CBDT, New Delhi. This, being a policy issue, this Authority should not render any ruling.
In the very first question (Q.No.1) the applicant raised the issue whether tax is required to be deducted at source under section 192 of the Act by the applicant on the contribution to the superannuation fund (for an amount exceeding one lakh rupees per employee) as perquisite. The answer to this should be in the affirmative. As per clause (vii) of section 17(2) of the Act, the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees shall be treated as “perquisite” and therefore, the amount of contribution in excess of Rs.1 lakh per employee shall be included in the salary of the employee concerned. That being the case, tax is deductible at source under Section 192 (1) of the Act and any failure to do so will render the employer liable to be deemed as an assessee in default under Section 201(1) of the Act.
The Question No. 2 raised by the applicant has to be decided as per the proper scheme of the Act. The provision of Section 192(1A) is not automatic. Section 192(1A) comes into play only when the employer performs some positive act in the sense that the employer at his option pays the tax on the perquisites not provided by way of monetary payment. This requires actual payment of the tax by the employer at his option and that too, on perquisites which are not provided by way of monetary payment. In other words, if the perquisites are provided by way of some monetary payment, Section 192 (1A) cannot be pressed into service and in that case, tax on such perquisites borne by the employer will be grossed up in terms of Section 195A in computing the income of the employee concerned. The applicant has contended that the contribution to superannuation fund in respect of an employee in excess of Rs.1 lakh is a perquisite which is not provided by way of monetary payment. The applicant’s contention is not tenable. Clearly, the contribution to superannuation fund in respect of an employee involves actual payment of money and the corresponding perquisite stands provided to the employee by way of monetary payment which will accumulate for the purpose of payment of annuity, pension, etc. to the employee as retirement benefits. Merely because the contributed amount is not directly paid to the employee at the first instance, it cannot be said that the perquisite arising to the employee out of such contribution has not been provided by way of monetary payment. Therefore, once the perquisite in question stands provided by way of monetary payment, tax on such perquisite even if borne by the employer cannot be held to be exempt under Section 10(10CC) of the Act, Section 192(1A) cannot be pressed into service and the grossing up provision as applicable under Section 195A will fully apply in the case.
6. For a proper appreciation of the controversy which calls for decision, the relevant provisions which have to be considered for the purpose of this judgment, are extracted below. Section 10 (10CC) states that:
“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included.
(10CC) in the case of an employee being an individual deriving income in the nature of a perquisite, not provided for by way of monetary payment, within the meaning of Clause (2) of Section 17, the tax on such income actually paid by his employer, at the option of the employer, on behalf of such employee, notwithstanding anything contained in Section 200 of the Companies Act, 1956 (1 of 1956).”
Section 17 (2) outlines various perquisites, such as:
(1) Value of rent-free or concessional rent accommodation provided by the employer.
(2) Value of any benefit/amenity granted free or at concessional rate to specified employees. Etc. Specified employees are company directors, employees with substantial interest in the company and any other employee whose salary income exclusive of non-monetary benefits and amenities exceeds Rs. 50,000/-.
(3) Any sum paid by employer in respect of an obligation, which was actually payable by the assessee.
(4) Any sum payable by the employer, directly or through a fund for assurance on life of the employee or to effect contract for an annuity. However, sums payable to recognized provident funds or approved superannuation funds, and certain other specified funds are exempt.
(5) Value of any other fringe benefit as prescribed (excluding fringe benefits subjected to the Fringe Benefit Tax).
Besides rent-free or concessional rent accommodation, other perquisites taxable in the hands of the employee include provision of services of domestic employees, supply of amenities, for household consumption, free or concessional educational facilities for any member of the employee’s household, interest free or concessional loan, and benefits resulting from the use of any moveable asset.
7. We have considered rival submissions. On analysis of the factual scenario it is clear that the applicant does not get a vested right at the time of contribution to the fund by the employer. The amount standing to the credit of the funds like the pension and fund account, social security of medical or health insurance would continue to remain invested till the assessee becomes entitled to receive it. The vesting right to receive the amount under the scheme or plan did not occur. We are of the opinion that the judgment of the Hon’ble Supreme Court in CIT v. L.W.Russel AIR 1965 SC 49 applies to the facts of the present case. There, it was held that one cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. The employee must have a vested right in the amount. In this context, the decision of the Delhi High Court in CIT v. Mehar Singh Sampuran Singh Chawla  90 ITR 219 can be noted, where it was held that the contribution made by the employee towards a fund established for the welfare of the employees would not be deemed to be a perquisite in the hands of the employees concerned as they do not acquire a vested right in the sum contributed by the employer. Similar view was expressed in Yoshio Kubo v. CIT  357 ITR 452/218 Taxman 164/ 36 taxmann.Com. 1 (Delhi). The Hon’ble Supreme Court in L.W. Russel’s case (supra) spelt out a wider and fundamental principle, i.e. when the amount does not result in a direct present benefit to the employee who does not enjoy it, but assures him a future benefit, in the event of contingency, the payment made by the employer, does not vest in the employee. We are of the opinion that the new Act does not make any significant departure from this aspect.
8. That being so, the question No.1 posed is answered in the negative and there is therefore no need to answer question No.2.
[Citation : 364 ITR 337]