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Section 10(10CC) of the Income Tax Act provides exemption from grossing up income tax liability with respect to taxes borne by an employer on the non-monetary perquisites provided to employees.
Furthermore, it provides overriding effect to section 200 of the Companies Act, 1956 that prohibits companies from paying tax-free remuneration to employees.
The concept of non-monetary perquisites has not been defined in the Income Tax Act.
However, there have been a few decisions by Tribunals, and a recent decision of the Uttarakhand High Court, which deliberated on whether the tax borne by an employer is a non-monetary perquisite.
Employment contract
The Delhi Special Bench in the case of RBF Rig Corporation; Delhi Tribunal in the case of Transocean Offshore Deepwater Drilling Inc and Transocean Discoverer; and Uttarakhand High Court in the case of Sedco Forex International Drilling Inc have held that the tax borne by the employer on remuneration paid to employees will be regarded as non-monetary perquisite and, accordingly, exemption under section 10(10CC) would apply while computing tax liability.
The basis for the above decisions was the obligation of the employer to pay tax on behalf of employees, according to the employment contract — and as the employer is paying taxes directly, there is no payment flowing to the employee.
Overriding effect?
The issue is whether section 10(10CC) has an overriding effect on section 200 of the Companies Act, and if yes, whether an Indian company can enter into an arrangement with an employee, agreeing to bear the tax liability on the employee’s remuneration.
It may be noted that the aforesaid taxpayers are foreign companies, and provisions of the Companies Act do not apply to them.
However, the observations of the Uttaranchal High Court in the case of Sedco Forex International Drilling with regard to section 200 of the Companies Act are noteworthy.
The Court observed that “Section 200 of the Companies Act, 1956 prohibits companies from paying to any officer or employee thereof any remuneration free of income tax. Tax-free remuneration is one thing and payment of remuneration as well as tax payable thereon is another thing.”
It further observed that “…Therefore despite prohibition contemplated in the Companies Act for payment of tax-free remuneration to an employee, Section 10(10CC) of the Act has provided that notwithstanding anything contained in the Companies Act, an employee shall be entitled to exclude his income by way of remuneration/salary provided the same is not a monetary payment to him and is also provided as perquisite in clause (2) of Section 17 of the Act and thereby has acknowledged that remuneration plus tax payable thereon is permissible”.
Need for clarification
The Court’s observations give the impression that there would not be any violation of section 200 of the Companies Act if the employer agrees to pay net of tax remuneration to employees out of contractual agreement, and such tax is directly paid to the treasury.
Having said that, it may be noted that there has been no corresponding amendment or reference or clarification in section 200 of the Companies Act to bless the tax treatment provided in section 10(10CC) of the Act, and interpreted by the judicial authorities, especially with reference to entering into an employment contract wherein an employer agrees to bear the tax liability of an employee on remuneration.
Homi Mistry is Partner and Pallavi Dhamecha is Manager, Deloitte Haskins & Sells
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