Taxability of Pick-Up and drop facility provided by employers?

PICK-UP and drop transport facility provided by employers is not a perquisite and hence not liable to tax, according to a recent ruling by a tax tribunal.  In a decision that has implications for the sectors such as BPO and IT, the Mumbai Income-Tax Apellate Tribunal (ITAT) has held that companies providing such a facility were not liable to deduct tax on the expenditure incurred on it.

ITAT has held that a specific explanation had been provided in the Income-Tax Act, which does not consider transport facility provided by employer to employees from residence to office and back a taxable perquisite. It said collective transport benefit was not even taxed as salary or as a fringe benefit under the FBT regime. Moreover, it was not possible to compute the value of transport facility attributable to each employee, as the service was in the nature of a composite service collectively provided to employees throughout the year, it said, adding that no tax was required to be deducted at source on expenditure incurred by a company on transport facility.

The ruling was given in a case pertaining to ITeS and BPO company, Transworks Information Services. The company gave a transport allowance of Rs 800 per month to its employees as well as provided a conveyance facility. The I-T Department had contended that the company was an ‘assessee in default’ for not deducting tax at source on the expenditure incurred on the pick-up, drop facility and transport allowance given to employees. As an assessee in default, the company would have been liable to pay tax as well as penal interest on the tax for the period it was not deducted.

The commissioner appeals upheld the order given by the assessing officer that had held the company an assessee in default. It had said employees could not enjoy double benefit by way of conveyance facility and transport allowance, and tax was needed to be deducted on the expenditure incurred on the transport service.

Analysis of the case law mentioned above Judgment in the case of Transworks Information Services Ltd vs Income-tax Officer (TDS) IT Appeal No. 1192 (MUM) of 2007 is as follows:-

Background –The Income-tax Appellate Tribunal, Mumbai has held that pick up and drop transport facility provided to employees should not be considered as taxable perquisite in the hands of the employees.

Facts of the case

• M/s Transworks Information Services Ltd (‘the company’) was carrying on the business of information technology enabled services, call centers and BPO industries.
• The company paid conveyance allowance of Rs.800 per month to its employees.
• The company also provided bus service facility for picking up and dropping employees. The said facility was provided from nearest railway station to office and vice versa during the day and from residence to office and back during the night.

Issues before the Tribunal

• Whether expenditure incurred by the company on such transport facility provided to the employees should be treated as perquisite in their hands.
• Whether the company was ‘assessee in default under Section 201 for non-deduction of tax at source on such perquisite?

• On account of non-deduction of tax at source, whether interest u/s.  Section 201(1A) under the Income-tax Act, 1961 (‘the Act’) should be charged?

The company’s contention

• The conveyance allowance of Rs.800 per month given to all employees was not taxable as income in the hands of employees by virtue of the specific exemption u/s. Section 10(14)(i) allowed under the Act. Accordingly, the company was not liable to deduct tax at source on the same.
• As regards transport facility, though the same is a benefit in the hands of employees, it is specifically exempt under the Act by Explanation to section 17(2)(iii).
• The company also contended that the transport facility cannot be attributed as income in the hands of individual employees, as the same is enjoyed collectively by the employees. The expenditure incurred on the transport facility cannot be clubbed with the conveyance allowance. Accordingly, the company was not liable to deduct tax at source on the same.

The Assessing Officer’s (AO) decision

• The conveyance allowance and the expenditure incurred by the company on the transport facility were perquisites in the hands of the employees. Therefore, the company was liable to deduct tax on such perquisites.
• On account on non-deduction of tax on such perquisites, the company was treated as ‘assessee in default’ under the Act and further, interest was charged under the Act.

The Commissioner of Income-tax (Appeals) [CIT(A)] decision

• The employees of the company enjoyed double benefits – one by way of conveyance allowance in cash and other by way of the transport facility.
• An exemption in respect of conveyance allowance cannot be allowed if free conveyance is provided by the employer.
• The exemption section under the Act is worded in an unambiguous manner which conveys that tax payer can avail exemption either of the special (conveyance) allowance or the benefit and not of both simultaneously.
• In the instant case, the benefit of transport facility provided over and above the conveyance allowance (exempt upto Rs.800 per month), is income in the hands of the employees. Accordingly, the company was required to deduct tax at source on the expenditure incurred on the transport facility.

The Tribunal’s decision

• On account of the specific Explanation provided in the Act which does not consider employer provided vehicle to employees from residence to office and back as perquisite, the transport facility

provided by the company to the employees cannot be considered as a taxable perquisite in the hands of the employees.

• Also, it is not possible to compute the value of transport facility attributable to each of the employee since it is in the nature of composite service collectively provided to the employees throughout the year. This collective transport benefit was not even taxed as salary or as fringe benefit even after the introduction of the the Fringe Benefit Tax Regime.
• In view of the above, no tax is required to be deducted at source on the expenditure incurred by the company on transport facility. Accordingly, the company cannot be treated as ‘assessee in default’ and no interest should be charged under the Act.

Our Comments:-This ruling highlights that pick up and drop transport facility provided to employees should not be considered as a taxable perquisite in the hands of the employee.

——————————————————————————–

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH ‘E’: MUMBAI

BEFORE SHRI S.V. MEHROTRA, (AM) AND SHRI GEORGE GEORGE .K, (JM)

ITA No.1182/M/07
Assessment Year : 2005-06

Appellant by : Shri Yogesh Thar
Respondent by : Shri Sandeep Goel

O   R   D   E   R

Per George George .K, (JM).

This is an appeal filed by the assessee and it is directed against the order of CIT(A) dated 24.11.2006. The Assessment Year concerned is 2005-06. The order of the CIT(A) emanates from the order passed ujs.201, 201 (1A) of the IT Act.

2. The grounds raised in this appeal are reproduced below :-

“GROUND I

1. On the facts and in circumstances of the case and in law the CIT(A) erred in confirming the order of the ITO(TDS) 3(4), Mumbai (“the Assessing Officer”) thereby treating the expenditure incurred on transport facility given to the employees of the Appellant company as drop and pick up facility from nearest railway station to office/ residence of employees to office and vice versa, in addition to monthly transport allowance of Rs. 800/ – per month, as “perquisites” in the hand of employees and thereby holding that the appellant is liable to deduct tax at source on such perquisite granted to its employees.

2. The appellant prays that it be held that the expenditure incurred on transport facility given to the employees of the Appellant company as drop and pick up facility from nearest railway station to office/ residence of employees to office and vice versa cannot be treated as perquisites given to employees particularly in view of explanation to section 17(2)(iii) of the IT Act) 1961 (“the Act”) and that such expenditure will not attract the provisions of tax deduction at source under section 192 of the Act.

GROUND II

1. On the facts and in circumstances of the case and in law the CIT(A) erred in confirming the order of the Assessing Officer treating the appellant as ((assessee in default” under section 201(1) of the Act for alleged non deduction of tax at source by the appellant on the expenditure incurred on transport facility given to the employees of the appellant company as drop and pick up facility from nearest railway station to office/ residence of employees to office and vice versa.

2. The Appellant prays that it be held that the appellant is not the assessee in default under section 201(1) of the Act.

GROUND III

1. On the facts and in circumstances of the case and in law the CIT(A) erred in upholding the levy of interest under section 201 (1A) of the Act.

2. The Appellant prays that the penalty under section 201 (1A) of the Act be deleted.”

3. The brief facts are, assessee company is carrying on the business of information technology enabled services, call centres and BPO industries. On 10.3.2006 survey u/s. 133A was conducted on the assessee company by the office of Income tax Officer (TDS)(3)(4). The assessee paid conveyance allowance of Rs.800/- per month to every employee. The assessee also provided bus service facility for pick up and dropping employees. It was stated that such pick up and drop during day time was only up to the next station and home pick up and drops were given only during night times. It was seen that assessee had debited an amount of Rs.58,04,737/- on account of such bus service facility.

4. The Assessing Officer required the assessee to explain as to why tax at source was not deducted on conveyance allowance and the bus service facility provided to the employees exceeded the limit of exemption. Not being satisfied by the explanation offered by the assessee the Assessing Officer treated the assessee as an assessee in default and raised demand u/s. 201 for non deduction of tax amounting to Rs.5,32,103j- and charged interest u/s.201(1A) of the IT Act amounting to Rs.62,850/-. Assessee being aggrieved by the above action of the Assessing Officer filed an appeal before the CIT(A). It was stated that the conveyance allowance of Rs.800/- p.m. given to all employees was income not included in the total income of the employees by virtue of Section 10(14) of the Act. As regards bus facility, it was stated that employees of the company at Mumbai did not get home pick up both ways. During the day time only station pick ups and drops were available. Home pick ups and drops are given only during night time therefore it was contended that the employees of the assessee company have to incur substantial cost for travel up to the pick up point available. Its main plank of argument was that though the expenditure or transport facility is a benefit, the same is exempt under explanation to section 17(2)(iii) of the Act. The CIT(A) for his reasons mentioned in para 6-8 of his order dismissed the appeal filed by the assessee. The assessee being aggrieved has filed this appeal.

5. The ld. AR of the assessee contended that the conveyance allowance of Rs.800 / – per month provided to each employee is not in dispute, for the same was not income included in the total income by virtue of Section10(14) of the Act.. Now the dispute is revolving around the expenditure incurred by the assessee company for the bus facility for providing pick up and drops to its employees. He contended that section 17(2) gives an inclusive definition of the word “perquisite” and explanation to section 17(2)(iii)( c ) grants specific exemption with regard to value of transport facility given by the company for journey from the residence to office. He also relied on the extracts of the budget speech of Minister of Finance while introducing the fringe benefit tax (273 ITR (St.) 56). He contended that the expenditure incurred for the transport facility cannot be attributed as income to the employees and such attribution has been done by the Assessing Officer in equal proportion to each of the employees. He stated when bus facility is enjoyed collectively by the employees, individual employee cannot be attributed to any portion of expenditure as the income of the employee, therefore, it is not possible to deduct tax at source hence, action of the Assessing Officer confirmed by the CIT(A) is wrong.

6. The finding jconclusion of the CIT(A) was assailed by ld. Authorised Representative in form of written submission and same is reproduced below for easy reference.

(‘The points raised by the CIT(A) and the response given by the assessee are as follows:

1. Para 6.1 of the Order of CIT(A)

In other words, the employees of the appellant enjoys two/double benefits one by way of transport allowance in cash and the other by way of the benefit of pick up vehicles provided for journey to office from residence and vice versa.

Response of the assessee: That is not true.

All the employees do not enjoy this facility. The use of transport facility is voluntary. There are many employees who own their own vehicles and use them for commuting between office and residence.

In day traveling employees get only pickup and drops upto and from the station nearest to office. From station to residence or from residence to station they have to travel on their own.

2. Para 6.1 of the order of the CIT(A)

The benefit provided over and above the exemption limit of Rs.800/- as transport allowance, is income in the hands of the employees and the appellant was required to deduct tax at source while making payment of hire charges or debiting amounts in the accounts.

Response of the assessee: In law this can not be done.

– The transport allowance given to the employees does not exceed the limit of Rs. 8001 – per month as given to law.

– The expenditure on transport facility is surely a benefit, however the same is exempt under the explanation to section 17(2)(iii) of the Act.

– The expenditure on restricted transport facility can not be clubbed with the allowance and then disallowed.

3. Para 6(2) of the Order of the CIT(A)

Response of the assessee: These clauses (Section 2(24) (iiia) and (iiib) does not apply in the case.

Clause (iiia) of section 2(24) reads as under

“Any special allowances or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profits. ”

Response of the assessee

The transport facility provided by your Appellant forms part of perquisite which is exempt from tax. The perquisite is specifically excluded from the said clause.

1. Clause (iiib) of section 2(24) reads as under.

Any allowance granted to the assessee either to meet his personal expenses at the place where the duties of this office or employment of profit are ordinarily peiformed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living.

Response of the assessee

The transport facility provided by your appellant is a part of perquisite covered by section 17)2) of the Act and it is not an allowance.

2. Para 6.3 of the order of the CIT(A).

If for the purpose of sub clause (iii), the same is not regarded as benefit in the nature of perquisite, it does not mean that the same is restricted to be an income in the nature of an allowance or benefit as per sub clause (iiia) (iiib) of section 2(24) of the IT Act.

Response of the assessee

As the transport facility given to the employees for commuting between residence to home and office/ nearest railway station is well covered within the meaning of perquisite, then it can not be covered within the sub clause (iiia) and (iiib) of section 2(24) of the IT Act.

5. Para 6.3 of the order of the CIT(A)

The Rule 2BB has further provided that the exemption will not be allowed in a case where the conveyance is provided by an employer.

Response by the assessee:

The rule 2BB (c) reads as under.

“any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit:

provided that free conveyance is not provided by the employer.

The above proviso pertains to the allowance (your appellant case pertains to perquisite and not an allowance) given to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit.

6. Para 6.3 of the Order

Thus the amount exceeding the limit of Rs.800/ – by way of expenditure incurred on the benefit provided as use of vehicles are certainly liable for deduction of tax at source.

Response by the assessee: The expenditure can not be clubbed with allowance.

– The rule 2BB talks of allowance and section 17(2) covers perquisite. Your Appellant has not given the conveyance allowance exceeding a sum of Rs.800/ – per month. The said transport expenditure which is part of perquisite as covered in section 17(2) of the Act can not be added to the allowance and disallowed

– Further 17(2) of Rule 2 BB does not prescribe any’ limits on the transport expenditure incurred for such purposes. The said rule 2BB comes into play only when there is an allowance.

7. Para 6.4 of the order of the CIT(A)

Section 10(14) is very clear about this which lays down that the assessee can avail exemption either of a special allowance or a benefit. The words used “or” between ‘special allowance’ or ‘benefit’, unambiguously conveys that an assessee can avail exemption either of the two and not both simultaneously.

Para 7 of the Order of the CIT(A)

The twin benefit could have been allowed if the section begins with “any such special allowance and benefit” instead of the word ‘or’ in between.

Response of the assessee:

Section 10(14){i) reads as under:

“any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause {2} of section 17, specifically granted to meet expense wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit as may as prescribed to the extend to which such expenses are actually incurred for that purpose.”

– In many places in the Act when the word ‘or’ is used, it has the meaning of including both the items. The intention of the section is two cover both the items special allowance as well as benefits.

– The section 10 (14 )(i) specifically excludes the perquisite within the meaning of clause (2) of section 17 of the Act, The transport expenditure incurred by the employer is part of perquisite as covered by section 17(2 ) of the Act and hence is not covered by section 10(14)(i) of the Act.

8. Para 6.4 of the Order of the CIT(A)

Further the contention of the appellant that CBDT Circular No. 6/2004 dated 6/ 12/2004 clarifies the exemption of both the transport allowance and conveyance facility provided by employer from being taxed in the hands of the employees, is misdirected and misquoted to the extent that the benefit like travel on tour and transfer, leave travel, daily allowance to meet tour expenses as prescribed, medical facilities subject to conditions, are only referred to, which would continue to exempt.

Response by the assessee:

Your appellant has not all referred the said CBDT Circular In its submission before the Assessing Officer or CIT(A).

In any case the relevant para XV of the said CBDT Circular reads as under:

“XV: Residual Clause – A benefit or amenity not included in the rule shall be valued at the cost under an arm’s- length transaction to the employer where the employer pays for the benefit or amenity. However, the benefit of conveyance to and from residence to place of work, periodicals and journals required for discharge of work and expenses on telephones including a mobile phone shall not be included in calculating perquisite value.

It is pertinent to mention that benefits exempt under section 10(13A), 10(5), 10(14), 17 etc. would continue to be exempt. These include benefits like travel on tour and transfer, leave ravel, daily allowance to meet tour expenses as prescribed, medical facilities subject to conditions.

The above circular specifically excludes the benefit of conveyance to an from residence to place of work in calculation of perquisite. The circular also clarifies that the benefit exempt under Section 10(14) continues to be exempt.

9. Para 7 of the Order of the CIT{A).

The decision relied upon by the appellant is also distinguishable and not applicable to the facts and circumstances of the case of the appellant. Therefore, this ground is decided against the appellant.

Response by the assessee

– Your appellant has not relied on any decisions while making the submissions before Assessing Officer or CIT(A). This only shows that CIT{A) has issued standard order without considering any submission of the appellant or application of mind.”

7. The ld. DR supported the order of authorities below and contend that explanation to 17(2)(iii) is not applicable to the facts of the present case and any allowance/benefit exceeding Rs.800 / – per month is liable for deduction at source.

8. We have heard the rival submissions and perused the material on record. While considering the scope and ambit of “salary” and the quantum of salary exigible under the Income Tax Act, one has to confine himself to sections 15 to 17 and the definition of “income” contained in section 2(24) of the Income tax Act, especially clauses (iii), (iii a), (iii b) and (iv) of Sec. 2(24). Any travel beyond the above provisions as did by the Assessing Officer and the CIT(A) may result in faulty conclusion. Keeping the above principle in mind, the question that arises for consideration, namely, as to whether providing bus service free of cost by the employer is to be treated as income at the hands of employees, has to be considered, dehors section 10(14) (i) and (ii).

9. The relevant provisions that have bearing on the issue, according to us are; Sec. 2(24)(iii), (iiia), (iiib), Sec. 17(iv); Sec. 17(2); 17(2)(iii); 17(2)(iii)(c) Explanation to Sec. 17(2)(iii)(c). Those provisions read: –

S.2(24) “income includes-

(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17 ;

(iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit;

(iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost .or living;

S. 17. “Salary”, “perquisite” and “profits in lieu of salary” defined. – For the purposes of sections 15 and 16 and of this section, –

(l)”salary” includes-

————————————————————————————————

(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages ;

S.17(2) “perquisite” includes-

————————————————————————————————

(iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases-

(a)—————————————————————-

(b)—————————————————————-

(c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head “Salaries”, (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds [fifty thousand rupees];

Provided that nothing contained in this sub-clause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any Employees’ Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued in this behalf by the Central Government:

10. Sub clause (iii) which alone has got application is being dealt with later. Sub-clause (iiia) being one referring to benefit other than perquisite included under sub clause (iii) cannot have application. Sub clause (iiib) relates to personal expenses at the place of office or residence and the same cannot have application to expenses whether personal or otherwise from residence to office and vice versa.

11. Under section 17 (iv) salary includes perquisites and under section 17(2)(iii) ‘perquisite’ (leaving out details not necessary for this case) includes the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer (including a company) to an employee and whose income under the head “salaries” exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds a particular limit (we are not concerned with the proviso to clause c).

12. Sub section (2) to section 17 while considering the issue of use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office and back, necessarily the same can be considered only vis-a.-vis section 2(24).

13. Undoubtedly the facility of bus service 1S an amenity and such an amenity provided free of cost as contemplated under section 17(2)(iii) and in the light of section 2 (24)(iii) the value of any perquisite taxable under clause (2) of section 17 is income.

14. Now, the question is: does providing free bus facility, no doubt, a perquisite, is taxable perquisite under section 2(24)(iii). What is taken into consideration is the value of any perquisite taxable under clause (2) of section 17. In the absence of the Explanation to sub clause (2) to section 17 the value of the bus service provided free of cost is taxable; whereas under the Explanation to sub clause (2) to section 17, for the removal of doubts, it is declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessaional rate for the purposes of this sub-clause;

15. For the above reasons reliance on sub clause (iiia) of Sec.2(24) and on Sec.l0( 14)(i) by the CIT(A) is misplaced.

16. For the above conclusion we also draw support from the recent decision of the Hon’ble Gujarat High court in the case of CIT Vs. Reliance Industries Ltd. reported in 221 CTR 175 wherein their Lordship held as follows:

“under the relevant Explanation any expenditure incurred by the employer for journey of the employee from residence to the office or other place of work, and from office or other place of work to the residence of the employee, such amount of expenditure shall not be regarded as benefit or amenity granted or provided to the employee free of cost or at a concessional rate for the purpose of including such amount as taxable perquisite in hands of the employee. The provision, therefore, envisages that the expenditure is in relation to use of any vehicle provided by the employer. There is no qualification as to the nature of the vehicle or as to ownership of the vehicle. In fact the Assessing Officer also accepts that if the vehicle is owned by the employer or hired by the employer the amount of expenditure cannot be treated as perquisite in hands of the employee. Once this is the position it is not possible to read any further prohibition as the revenue wants, namely, if the vehicle is owned by the employee the expenditure is not allowable and has to be taxed as perquisite in hands of the employee”.

17. Without prejudice to the foregoing reasoning stated, the whole matter can be looked from a different angle namely the bus facility is not taxable since computation of value of the facility is not possible m the individual hands of the employees. When cost/value of item is not ascertainable the computation machinery itself fails and as such, no income is chargeable in such case. In the case of Sunil Sidhharthbhai Vs. CIT 156 ITR 509 (SC), the Hon’ble Apex Court applied the decision of B.C. Srinivasa Setty’s case 128 ITR 294(SC) and held that when consideration is not capable of being determined on the date of transfer of capital asset, no capital gains would arise since, computation machinery itself would fail. Though the aforesaid decision of the Hon ‘ble Apex Court has been rendered in the context of capital gains, the underlying principle remains the same Le., when the value of any benefit/amenity cannot be determined, the same would not be chargeable to tax since computation machinery itself would fail. According to us it would not be possible to compute the value of such facility attributable to each of the employees since it is in the nature of composite service collectively provided to the employees through out the year. In fact the Finance Minister in his budget ·speech for’ 2005-06 -(273-ITR-(St)56), -while introducing Fringe Benefit Tax (FBT) made an observation on this Issue which is reproduced here below:

“I have looked into the present system of taxing perquisites and I have pointed that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer not the employee pays any tax in these benefits which are certainly of considerable material value. At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer. However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net. “

From the above, it is abundantly clear that the ‘transport service for workers and staff’ is collectively enjoyed benefit which is neither taxed as salary nor as fringe benefit tax even after introduction of FBT in Chapter XII H of the Act.

18. For the above reasons the orders of Assessing Officer and CIT(A) are not correct and hence we reverse the same. Therefore, the grounds raised by the assessee in this appeal are allowed.

19. In the result, the appeal filed by the assessee stands allowed.

Order pronounced in the open court on 16.2.2009.

NF