‘Tax paid by employers for staff is a non-monetary perquisite’

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Since liberalisation of the Indian economy, a large number of foreign companies have been seconding their employees to India for employment over the past few years. These individuals are liable to pay tax in India for rendering services in India. At the same time, they could also be liable to pay tax in their home country, depending on their home country tax laws.

To ensure that these individuals do not pay additional tax over and above their home country tax, the employer usually agrees to bear/pay taxes in India on behalf of such employees. This results in the tax payment being considered as income for the employee in India.

It is a fairly settled matter that such payment is in the nature of perquisite in the hands of the employee. However, whether this is a monetary or non-monetary perquisite, has been a matter of litigation for long.

This issue assumed much importance since the introduction of Section 10(10CC) of the Income Tax Act, 1961, (the Act), whereby, tax paid by the employer on behalf of the employee on non-monetary perquisites is exempt in the hands of the employee.

In a few earlier decisions passed by various authorities including the Delhi Income Tax Appellate Tribunal (ITAT) decision in Western Geo International Ltd, it has been held that tax on tax paid by the employer is part of salary and is required to be added to the income of the employee. In other words, multiple grossing up is required to be done in respect of such tax on tax.

Recent judicial decision

In the case of RBF Rig Corporation LLC, (RBF), a non-resident company had employed foreign nationals in India. These employees were paid salary, the tax on which was to be borne by the employer. In the employee’s return of income, tax paid by the employer was added as a perquisite. However, no further tax on the same was included on the position that the same was a 'non-monetary payment' to the employee.