Income Tax Appellate Tribunal - Bangalore
M/S Mindtree Limited , Bangalore vs Assessee on 5 December, 2013
ITA No.1087 of 2012 Mindtree Ltd Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
Bangalore 'C'Bench, Bangalore
Before Shri N. Barthvajasankar, Vice President and
Shri George George K. Judicial Member
ITA No. 1087/Bang/2012
(Assessment year: 2009-10)
M/s. MindTree Ltd, Vs. Asstt. Commissioner of
Global Village, RVCE Post Income Tax (LTU)
Mysore Road Bangalore
Bangalore 560059
PAN: AABCM 8839 K
(Appellant) (Respondent)
Assessee by: Shri Tata Krishna, Advocate
Department by: Smt.H.L.Sowmya Achar,DR
Date of Hearing: 05/12/2013
Date of Pronouncement: 05/12/2013
ORDER
Per George George K. J.M.
1. This appeal of the assessee company is directed against the order of the CIT (A)-LTU, Bangalore, dated 21.6.2012. The relevant assessment year is 2009-10.
2. The concise grounds raised by the assessee, in its Memorandum of appeal, are as under:
(1) That the CIT (A)-LTU was not justified in sustaining the addition of Rs.1,29,473/- being 20% of Rs.6.47 lakhs incurred towards event management while computing the value of taxable Fringe Benefits [FB];
(2) That the CIT (A) was also not justified in upholding the additions of -Page 1 of 15
ITA No.1087 of 2012 Mindtree Ltd Bangalore
(i) Rs.6,87,089/- being 20% of Rs.34,35,443/- paid to Org. Indirect;
(ii) Rs. 41,772/- being 20% of Rs.2,08,860/- paid to External faculties; &
(iii)Rs.38,38,958/- being 20% of Rs.1,91,94,739/- paid to Org. direct incurred towards staff training.
3. Briefly stated, the facts of the issues are as under:
The assessee is a company engaged in the business of software development and allied activities. During the year under dispute, the assessee had filed its return of fringe benefits on 30.9.2009, declaring taxable FB of Rs.8,85,08,943/- which was revised on 23.3.2010. During the course of proceedings, the assessee had furnished the reconciliation of FB with the financial statements. The AO had concluded the assessment u/s 115 WE(3) by making additions on the following expenses:
(i) Rs.1,29,473/- being 20% of Rs.6.47 lakhs incurred towards event management;
(ii) Rs.6,87,089/- being 20% of Rs.34.35 lakhs paid to Org.
Indirect towards staff training;
(iii) Rs.41,772/- being 20% of Rs.2.08 lakhs paid to external faculties towards staff training; and
(iv) Rs.38,38,958/- being 20% of Rs.1.91 crores paid to Org. Direct towards staff training.
3.1. Aggrieved, the assessee took up the issues with the CIT (A)-LTU. After due consideration of the assessee's contentions, the CIT (A)-LTU had recorded her findings, under each item-wise, as under:
(i) Rs.1,29,473/- :Page 2 of 15
ITA No.1087 of 2012 Mindtree Ltd Bangalore
"4.2. (e) I am of the considered opinion that the nature of expenses listed in Table I above wherein the appellant has furnished the break-up of event management expenditure makes it abundantly clear that such expenses are in the nature of 'Entertainment' liable to be treated as a deemed benefit u/s 115WB(2)(A) rather than as expenditure incurred towards 'conference' liable to be taxed u/s 115WB(2)(C). It is quite evident from a plain reading of the Finance Minister's speech dt 28.2.2005 and from the Memorandum to the Finance Bill, 2005 that where the benefits are usually enjoyed collectively by the employees and where the expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature, such expenses would clearly fall within the purview of FBT. In the instant case, the expenses towards event management have been largely incurred towards inauguration of its Chennai Facility and the Cricket Match which were for the collective benefit of its employees between different project teams. Obviously, the very nature of the expenses incurred makes it crystal clear that the event management expenses incurred to the tune of Rs.6,47,363/- is a deemed fringe benefit liable for FBT u/s 115WB(2)(A). This is even more apparent from a perusal of the answer to Q No.49 of CBDT Circular No.8/2005 dt. 29.8.2005 which is reproduced below:
'49. What is the scope of the expression 'entertainment in clause (A) of section 115WB(2)?
Ans: The meaning of the word 'entertainment' in clause (A) of sub-section (2)( of s. 115WB is of wide import . It includes all expenditure in connection with exhibition, performance, amusement, game or sport, for affording some sort of amusement and gratification." (emphasis supplies) In view of the foregoing analysis, I have no hesitation in upholding the AO's stand in treating even management expenses to the tune of Rs.6,47,363/- as a deemed fringe benefit except that instead of bringing it to tax under the head 'conference' u/s 115WB(2(C), I am of the view that it should rightly be brought to tax under the head 'entertainment' u/s 115WB(2)(A)..."Page 3 of 15
ITA No.1087 of 2012 Mindtree Ltd Bangalore
(ii) Rs.6,87,089/-, Rs.41,772/- & Rs.38,38,958/-
being 'staff training', 'staff training expenses - External Faculty & 'staff training expenses' respectively:
"5.2. As already pointed out in para 4.2, clauses (a) to
(e), it was evident that the purpose or rationale behind introduction of FBT provisions was to tax a benefit which was enjoyed collectively by the employees which was enjoyed collectively by the employees which was hitherto untaxed in the hands of the employees and in r/o which the employer was claiming deduction. Likewise, an expenditure which did not result in any benefit to an employee would not be liable for FBT as FBT was leviable only in a case where expenditure was incurred by the employer ostensibly for the purpose of business but included partially a benefit of a personal nature which could not be attributed or was difficult to attribute. It is crystal clear from the Finance Minister's speech and Memorandum explaining the FBT provisions reproduced in para 4.2 above that the rationale for levying FBT on the employer lies in the inherent difficulty in isolating the 'personal element' when there is collective enjoyment of such benefits and in attributing the same directly to the employee. It further provides that where attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax benefits in the hands of the employee, it is proposed to levy a separate tax known as FBT on the employer on the value of such benefits provided or deemed to have been provided to the employees. Thus, the intention of creation of a deeming fiction under section 115WB(2) is to include an expenditure resulting in collective enjoyment of fringe benefits by the employees and it is difficult or not feasible to attribute such benefit personally to employees.
5.2.1. In the instant case, it is quite evident from the nature of the staff training expenses incurred by the appellant on its employees that both elements of employer - employee relationship as well as collective benefit to the employees are clearly visible and omnipresent though incidentally this may ultimately Page 4 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore result in improving productivity in the long run. The appellant placed reliance on q No.51 of the Board's Circular wherein the Board clarified in its answer to the query as to whether expenditure incurred during in-house employee training would be considered as 'conference' expenses deemed to be a fringe benefit u/s 115WB(2)(C), the Board clarified that though FBT was not envisaged on expenditure incurred for purpose of imparting in-house training to employees, FBT would be payable on any expenditure incurred towards food & beverage, tour & travel and lodging & boarding in connection with such in-house training of employees. At the other end of the spectrum, it is pertinent to note that even with regard to expenditure incurred for attending training programs organized by Trade bodies or Institutions, vide answer to Q No.54, the Board clarified that since a training program entails a congregation of a number of persons for discussion or exchange of views, expenditure incurred for attending training programs organized by Trade Bodies or Institutions or any other agencies fell within the scope of provisions relating to expenditure incurred for purposes of conference contained in sec. 115WB(2)(C) and would be liable to FBT. However, it is abundantly clear that both the queries referred to above are in connection with the applicability or otherwise of the deeming provisions of sec.115WB(2)(C) which directly relates to 'conference' whereas the AO has clearly brought the other amounts to tax as 'employees' welfare' under the deeming provisions of sec. 115 WB(2)(E). Therefore, the whole argument of whether 'in-house' training includes within its ambit payment made to external faculty or not or merely denotes location is irrelevant. Under the circumstances, I am inclined to agree with the AO that staff training expenses, whether direct, indirect or external faculty, are all liable to FBT under the deeming provisions of sec. 115 WB(2)(E).."
3.2. Aggrieved, the assessee has come up with the present appeal. During the course of hearing, the learned AR, extensively quoting the Finance Minister's speech on 28.2.2005 as well as in the Lok Sabha on 2.5.2005, Memorandum to Page 5 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore Finance Bill 2005 and also his interview with the Economic Times, it was contended that the fringe benefits can only mean privilege, service, benefit or amenity provided directly or indirectly by an employer to his employees by reason of their employment. Taking hint from the provisions of s. 115WB (2), it was submitted that the deeming fiction in s. 115 WB (2) is with a specific purpose. The FM speech and Memorandum explaining the FBT provisions state that the rationale for levying a fringe benefit tax on the employer lies in the inherent difficulty in isolating the 'personal element' where there is collective enjoyment of such benefits and attributing the same directly to the employee. It was submitted that the Memorandum states that FBT is sought to be levied where attribution of the personal benefit poses problems. Thus, it was contended that deeming fiction u/s 115 WB is attracted only when the expenditure results in some benefit to employees and/or it is difficult to isolate the personal element of enjoyment or benefit. Further, it was claimed that s. 115 WB (2) incorporating a deeming fiction should be read along with the intention of Legislature to tax the collective enjoyment of benefits by the employees and that u/s 115WB (2), the expenditure should be incurred in the capacity of 'employer' for his employees and, therefore, legitimate business expenditure bereft of any benefit to employees is outside the ambit of FBT. For this proposition, the learned AR relied on the case laws, namely, (i) CIT v. Karnataka Power Transmission Corporation Ltd (2012) 20 Taxmann.com 142 (Kar); (ii) M/s. Toyota Kirloskar Motor Pvt. Ltd v. Addl CIT 2012-TIOL-313- ITAT, BANG; (iii) Bosch Lt v. DCIT (2011) 15 Taxmann.com 187 (Bang); (iv) DCIT v. Mescon 2010-TIOL-419-ITAT-BANG.
Page 6 of 15ITA No.1087 of 2012 Mindtree Ltd Bangalore 3.2.1. Referring to s. 115WB (1), it was submitted that the expression 'consideration for employment' will only consist of those benefits which the employee is entitled to as a matter of right or at his option to be exercised as an employees. In other words, it is that benefit which the employee can demand as his contractual right. It was, further, contended that the phrase 'consideration for employment' as used in s. 115WB (1) has to be read while interpreting the provision of s. 115 WB (2). In other words, it was explained, it is those expenditure which are incurred as 'consideration for employment' and enlisted under clauses (A) to (Q) in s. 115 WB (2) of the Act is subjected to FBT. For this proposition, the assessee has relied on the findings of the Pune ITAT reported in (2012) 149 TTJ (Pune) 365.
3.2.2. To drive home his point, the learned AR had averred that an expense would be subjected to FBT only if the following attributes are present, namely:
> Benefit is given in consideration for employment; > Benefit is available to employee as a matter of right; > Benefit is collectively enjoyed by the employees; > Benefits enjoyed in the hands of the employee are quantified;
> Expenditure incurred by the employer is ostensibly for the purpose of business but includes an element of benefit of a personal nature which cannot be attributed or is difficult to attribute; & > Payments were not made to third parties.
3.2.3. With regard to the sustaining of the addition of Rs.1,29,473/- by the CIT (A), it was argued that the CIT (A) ought not to have treated the expenditure of Rs.6.47 lakhs as 'entertainment expenditure' liable to be treated as deemed benefit u/s 115WB (2) as against the addition made by the AO as Page 7 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore 'conference' expenditure liable to tax u/s 115WB(2)(C) without affording an opportunity to the assessee to explain its stand, even though the details of expenses were furnished to the AO as well as the CIT (A)-LTU. It was contended that s. 115WB (2) provides that the fringe benefit shall be deemed to have been provided by the employer to his employees, if the employer had incurred in the course of business or profession any expense on or made any payment for the purposed enlisted in clauses (A) to (Q). In this context, the assessee relies on the Circular No.8/2005 dt.29.8.2005 [Q No.11]. With regard to the expenses incurred in the inauguration of its Chennai Facility, it was contended that the same cannot be termed as entertainment as it was in the course of the expansion of the assessee's business and not meant for the employees and the employees were not benefited from such expenses and as such, the FBT is not attracted in the instant case. It was claimed, the CIT (A)-LTU erred in treating Rs.34000/- paid towards items hired for Panache Cricket match conducted between different project team also as 'entertainment'. Quoting the provisions of s. 115 WB(2)(E), it was argued that it was evident from the Explanation to clause (E) that if an employer organizes any sports event for employees, the amount expended on the said event shall not be considered as employee's welfare and thereby cannot be regarded as FB and the employer was not required to pay FBT on the same. In conclusion, it was argued that the sum of Rs.6,47,363/- incurred by the assessee cannot be regarded as FB and, thus, not chargeable FBT on the said amount.
3.2.4. In respect of the staff training expenses of Rs.34,35,443/-, staff training expenses - External faculty of Page 8 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore Rs.2,08,860/- and Rs.1,91,94,739/- paid towards Org. direct under the head 'staff training expenses' for which 20% of the same were treated as liable to FBT, after explaining the graphic description of the staff training expenses and also elaborately quoting the clauses (A) to (Q) to s.115WB(2) of the Act, it was submitted that the authorities below were not justified in considering the aforesaid expenses as part of 'employee welfare' u/s 115WB (2)(E) of the Act as they have failed to appreciate that the expression 'welfare' in common parlance would mean the health, happiness and fortunes of a person or a group. Thus, it was argued, the expenses incurred towards staff training do not fall under the expression 'employee welfare'. It was, further, argued that the employee's welfare is a comprehensive expression which would include any expenditure where welfare of the employee is involved as medical reimbursement, recreation facilities offered for employees, incentive awards etc. In the instant case, staff training was provided by the assessee with an intention to increase the productivity of the employees which was evident from the above said description. It was argued that the CIT (A) had failed to appreciate that the purpose of providing the training was to equip the employees to perform their official duties efficiently. In other words, it was explained, the training provided was to improve the employee's productivity at the workplace by giving cutting-edge knowledge and ideas which directly benefits the assessee in carrying on its business more efficiently. It was, further, argued that the CIT (A) had failed to appreciate that if the purpose of incurring the expenses was to protect the employer's business interest and not the welfare of/benefit to the employees, the expenses incurred thereon would not be termed as 'employee welfare.' It was the stand of Page 9 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore the learned AR that the Board's Circular (supra) has clarified that the expenses incurred for the purpose of imparting in-house training to employees would be out of the ambit of FBT and that the authorities below have to failed to see the reason that the imparting the knowledge was not meant for the welfare of the employees. Referring to the provisions of s. 115WB (2)(C), it was claimed by the learned AR that the said provision that the fee paid towards participation in conference would not be part of the deeming provision. The explanation to sub-section (C) enlists expenditure are not forming part of conference. Any fee paid towards the participation by the employees in any conference is excluded from the scope of s. 115 WB (2)(C) and, thus, the participation fee in respect of a conference organized by an outside entity was excluded from the purview of FBT. If it were so, even staff training provided by the employer should also be free from FBT. The purpose of participation, it was contended, in any conference organized by a third party cannot be different from purpose of training provided by the employer itself to its employees. If the former cannot be regarded as employee welfare, the latter also cannot be regarded as such. Without prejudice the ruling of the Hon'ble Calcutta High Court in the case of Ravi Marketing (P) Ltd v. CIT (2006) 280 ITR 519 (Cal), the learned AR submitted that the reply to Q. No.54 [Circular No.8/2005] doesn't apply to the present case for the following reasons:
(i) The aforesaid expenditure was not incurred by the assessee for attending training programmes organized by trade bodies or institutions; &
(ii) The training programmes as referred to in the above query are general in nature whereas in the present case, it was an in-house training provided to the Page 10 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore employees of the assessee for improvement of productivity in the normal working hours.
3.2.5. In conclusion, it was submitted that the aforesaid expenses incurred towards staff training was not for the collective benefit/welfare of the employees and, thus, the same cannot be regarded as FB for the purpose of Ch., XII-H and not chargeable to FBT.
3.2.6 . On the other hand, the learned DR supported the stand of the authorities below. The learned DR had, further, argued that the issue has since been dealt with elaborately and, subsequently, came to a right conclusion by the CIT (A) that the staff training expenses whether direct, indirect or external faculty were all liable to FBT under the deeming provisions of s. 115 WB (2)(E) of the Act. It was, therefore, pleaded that the stand of the CIT (A) requires to be sustained.
3.3. We have carefully considered the submissions of both the parties and also perused the relevant materials on record. It is an undisputed fact that the assessee had incurred the following expenses:
Lighting arrangements during Chennai event Rs. 15,000 Items hired for Panache Cricket match finals for employees held in Bangalore between different project teams Rs. 34,000 Shareholders & Creditors meet during merger of Aztecsoft with Mindtree Rs. 71,617 Relates to Mindtree Chennai facility inauguration Rs.5,26,310 Page 11 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore 3.3.1. The break-up of expenses grouped under Event Management Expenditure account along with documentary evidences were furnished before the AO as well as the CIT (A) by the assessee. However, the CIT (A)-LTU, after analysing the provisions of s. 115 WB (1), 115WB(1)(a) of the Act, was of the view that the nature of expenses claimed make it abundantly clear that such expenses were in the nature of 'entertainment' liable to be treated as a deemed benefit u/s 115WB (2)(A) of the Act rather than as expenditure incurred towards conference liable to be taxed u/s 115WB(2)(C) of the Act. However, on a careful consideration of the expenses incurred/claimed by the assessee clearly establish that the aforesaid expenses were incurred for the purposes of (i) lighting arrangements for Chennai event; (ii) Share-holders and creditors meet during merger of Aztecsoft with Mindtree and (iii) Mindtree facility inauguration.
3.3.2. From the above, it is abundantly clear that none of those expenses were incurred by the assessee to endure any benefit to the employees whatsoever.
(i) To illustrate further, the assessee had incurred an expenditure of Rs.34,000/-for organizing the cricket match.
In this connection, we refer to Explanation to s. "115 WB(2)(E) of the Act that -
Explanation - For the purposes of this clause, any expenditure incurred or payment made to-
(i).........................................................
(vi) organise sports events for employees, shall not be considered as expenditure for employees' welfare;"
(ii) A sum of Rs.71,617/- and Rs.15,000/- were incurred for the purpose of organising shareholders and creditors meet Page 12 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore during merger of Aztecsoft with Mindtree. In these events, the question of involvement of any employees' welfare doesn't arise. Therefore, invoking the provisions of s. 115 WB (2)(A) of the Act do not arise as there was no any involvement of entertainment on the issue.
(iii) Rs.5,26,310/- was claimed being expenses incurred towards the inauguration of Chennai facility. On a perusal of the Invoice produced during the course of hearing, we find that the expenses incurred towards organizing the inauguration of Chennai facility [Source: Page 65 & 66 of PB AR]. Hereto, we find there was no any element of 'entertainment' in the said expenses so as to bring it under the purview of s. 115 WB(2)(A) of the Act.
3.3.3. In substance, the entire expenses of Rs.6.47 lakhs incurred by the assessee cannot be regarded as FB and, therefore, FBT is not chargeable on the said sum. Therefore, the CIT (A) was not justified in invoking the provisions of s. 115 WB(2)(A) of the Act to bring the said sum of Rs.6.47 lakhs under the ambit of FBT. It is ordered accordingly.
4. With regard to the second ground of the assessee to the effect that the CIT (A) was not justified in sustaining the additions of Rs.6.87 lakhs, Rs.41,772/- and Rs.38.38 lakhs in respect of staff training etc., we would like to point out that the authorities below have justified in their stand that the aforesaid expenses as part of 'employee welfare' u/s 115WB(2)(E) of the Act. However, as rightly pointed out by the learned AR, they have failed to appreciate that the expression of 'welfare' in Page 13 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore general parlance would mean the health, fortunes of a person or a group. Such being the scenario, they have failed to justify that the staff training falls within the sphere of 'employee welfare'. The purpose of providing training to its employees by its employer was to perform their official duties efficiently which will definitely enhance the productivity thereby the ultimate beneficiary would be the employer in carrying on its business more effectively and not the employees. If the purpose of incurring the expenses was to protect the employer's business interest and not the welfare of the employees and, as such, it cannot be termed as employees' welfare. These aspects have neither been considered by the AO nor by the CIT (A). Moreover, the comprehensive details of expenses incurred for the staff training have neither been furnished before the authorities below nor during the course of hearing before this Bench by the assessee to ascertain as to whether the assessee's claim that such expenses were not liable to FBT.
4.1. As could be seen from the order of the AO as well as the finding of the CIT (A), the issue has not been deliberated thoroughly by the authorities below before coming to an conclusion that the staff training expenses liable to FBT under the deeming provisions of s. 115WB (2)(E) of the Act, we are of the view that the issue requires a fresh and thorough verification at the level of the AO. To facilitate the AO to have a fresh look on the issue as directed (supra), the matter is restored on the file of the AO. In the meanwhile, the assessee through its learned AR is advised to furnish all the relevant details with supporting documentary evidence to enable the AO to carry out the Page 14 of 15 ITA No.1087 of 2012 Mindtree Ltd Bangalore directions of this Bench (supra) expeditiously. It is ordered accordingly.
5. In the result, the assessee's appeal is treated as partly allowed for statistical purpose.
Order pronounced in the Open Court on 5th December, 2013.
Sd/- Sd/-
(N. Barthvajasankar) (George George K)
Vice President Judicial Member
Bangalore dated 5th December, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, ITAT, Bangalore
6. Guard File
By Order
Senior Private Secretary
Income Tax Appellate Tribunal,
Bangalore Benches, Bangalore
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