Direct Taxes

Advance Rulings

Paresh P. Shah & Sweta Doshi

Decision of Authority for Advance Rulings in re R & B Falcon (A) Pty Ltd.
AAR No. 730 of 2006 dated December 13, 2006

Facts of the case

  1. R & B Falcon (A) Pty Ltd., the applicant, incorporated under the Laws of the Commonwealth of Australia is engaged in the business of providing Mobile Offshore Drilling Rig (MODR) along with crew on a day rate charter hire basis to drill offshore wells.

  2. Applicant entered into an agreement with ONGC for supplying MODR along with equipment and offshore crew.

  3. The employees of the applicant work on commuter basis; i.e., employee works on MODR for 28 days (called on days) which is then alternated by a 28 days field break (called off days) when he stays at the place of his residence.

  4. The employees are transported from their home country to the MODR in two laps — the first is from the nearest designated base city at the place of residence in the home country to a designated city in India for which the applicant provides free air tickets of economy class and the second is from that city in India to MODR through helicopter especially hired by the applicant for this purpose. On completion of 28 days they are transported back from MODR to the designated base city in their home country in the same manner. They are not paid any conveyance/transportation allowance.

Questions before the Authority

  1. Whether transportation cost incurred by the applicant in providing transportation facility for movement of offshore employees from their residence in home country to the place of work and back is liable to Fringe Benefit Tax (“FBT”)?

Contention of the Department

  1. The applicant has a PE in India and has been filing returns of its income under section 44BB of the Act.  Since its employees have been working on the rig in India, the applicant would be the employer in India and as such is liable to FBT on the travel cost.

  2. The employees of the applicant had to work and sleep on the rig for 28 days, therefore the place of residence is the rig and there is no element of transportation of these employees from the place of work to their residence on day-to-day basis during that period.  The expenses incurred on transportation of the employees from the home country to the place of work in India is covered under section 115WB(1)(a) and also u/s. 115WB(2)(F) as deemed fringe benefits.

  3. No tax is being paid by employees for the transportation, therefore the expenses incurred by the applicant have to be treated as fringe benefits under the Act. 

  4. As per the answer to the question No. 7, in relation to quantification of fringe benefits, in the Circular No. 8 of 2005 dated August 29, 2005, such benefits as are provided by the applicant to its employees are covered under FBT and it is only when they cannot be quantified, they will not be brought under FBT.

  5. Answers to question No. 34, in respect of Airline company, and question No. 78, in respect of reimbursement of car expenses, would show that the applicant falls within the ambit of clause (F) to sub-section (2) of section 115WB of the Act.

Contention of the applicant

  1. Answer to question no. 104, in respect of subsidized transport, of CBDT Circular No. 8 of 2005 and section 115WB(3) of the Act excludes from the operation of FBT any free or subsidized transportation facility provided by the employer to his employees for journeys by the employees from their residence to the place of work or such place of work to the place of residence.

  2. Having regard to the nature of the duties performed by the offshore employees, the transportation does not fall within the charge of FBT under section 115WA of the Act.

Ruling of the Authority

  1. The rigour of FBT leviable on the fringe benefits defined in sub-section (1) is to some extent mitigated by sub-section (3) of 115WB which is clarificatory in nature.  It is important to note that no relief is provided in the case of levy of FBT on the deemed fringe benefits specified in sub-section (2).

  2. The rationale of the first limb of sub-section (3) appears to be to avoid double taxation on the same privilege, service, facility or amenity in the nature of perquisites.

  3. It may be noticed here that sub-section (1) of section 115WB provides specifically amongst other benefits, the free or concessional tickets for private journeys and does not take in its fold free or concessional tickets provided by an employer to his employees for the purpose of journeys outside India, in the course of employment, more so because conveyance & tour and travel (including foreign travel) is specifically provided under items (F) & (Q) of section 115WB(2). Therefore the transportation costs incurred by the applicant in bringing the offshore employees from the place of their residence outside India to the rig (in India) will not fall within the second limb of sub-section (3) of section 115WB, which provides for exclusion from the operation of sub-section (1).

  4. According to the Model Convention on Income and Capital issued by OECD, it is stated that “the residence is that place where the individuals own or possess a home; this home must be permanent, that is to say, the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration.” Therefore in the context of FBT, it is clear to us that it connotes a place of abode where a person intends to dwell for a considerable length of time and not a place where a person is required to stay for a short duration in connection with his duties like the stay at the rig. In this view of the matter, it is not possible to accept the contention of Mr. Rawat that the rig is the residence of the offshore employees and therefore in coming and attending to duties on the rig, no transportation is involved. 

  5. Conveyance is something which serves as a means of transportation, like a vehicle, helicopter etc., transportation means movement of people or goods from one place to another. The terms tour and travel are used to denote movement from one place to another, one country to another, both for pleasure as well as for discharging of duty.

  6. The journey of the offshore employees from their home countries to the designated city in India, the applicant is providing free (round-trip) tickets; it would, therefore, fall under clause (Q) of sub-section (2). For the journeys from the chopper base in India to the rig for which the applicant is providing helicopters, it would amount to the employer providing conveyance. Inasmuch as the transportation of the employees from their residence in their home countries to the rig falls within the above-mentioned clauses (F) and (Q) respectively of sub-section (2) of section 115WB of the Act; it cannot but be held that the fringe benefits shall be deemed to have been provided by the applicant to the employees in the course of its business; and benefit of exemption u/s 115WB(3) will not be available and consequently the applicant is liable to pay fringe benefit tax under the Act.

  7. The question No. 7, in relation to quantification of fringe benefits and the answer thereto are of no consequence in this case. 

  8. The question No. 24 deals with the case of a foreign company, which sends its employees on tour to India; the answer provides that the liability to pay FBT would depend upon whether or not the company is an employer in India. A foreign company is treated as an employer in India provided it has employees based in India.

  9. The employer though a foreign company will be treated as employer in India inasmuch as a section of its employees are based in India. It is worthwhile to point out that the liability of the foreign company to pay fringe benefit tax on sending its employees on tour and travel to India depends on whether the foreign company is an employer in India and not whether the employees are working in India.

  10. Authority ruled that the transportation cost incurred by the applicant in providing the transportation facility for movement of offshore employees from their residence in home countries (outside India) to the place of work (rig in India) and back is liable to fringe benefit tax.

Source: www.aar.gov.in