Chargeability of Fringe Benefit Tax on channel placement charges

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘H’: NEW DELHI BEFORE SHRI G.D.AGRAWAL, VICE PRESIDENT AND SHRI I.C.SUDHIR, JUDICIAL MEMBER ITA Nos.1375/Del/2010, 4301/Del/2010 & 3937/Del/2011 Assessment Years: 2006-07, 2007-08 & 2008-09 M/s T.V. Today Network Limited, E-1, Videocon Tower, Jhandewalan Extension, New Delhi – 110 055. PAN: AABCT0424B. (Appellant) Vs. Deputy Commissioner of Income Tax, Circle-16(1), New Delhi. (Respondent) Appellant by: Shri Salil Agarwal, Advocate and Shri Shailesh Gupta, CA. Respondent by: Shri A.K.Mishra, CIT-DR. ORDER PER G.D.AGRAWAL, VP: These three appeals by the assessee are directed against the orders dated 2nd February, 2010, 2. In all these three appeals by the assessee, the only ground raised is about the chargeability of Fringe Benefit Tax (FBT) on channel placement charges. The amount of channel placement charges paid by the assessee in the years under appeal is as under:- Assessment Year Amount 2006-07 `11,56,32,046/- 2007-08 `26,52,71,827/- 2008-09 `37,09,63,828/- 3. At the time of hearing before us, it is stated by the learned counsel that the assessee company is broadcasting news through its four news channels, viz., Aaj Tak, Headlines Today, Dilli Aaj Tak and Tez. That during the years under consideration, the assessee was chargeable to tax in respect of fringe benefits for which the assessee had filed the returns of all the years under appeal. That the Assessing Officer made the addition of the expenses incurred by the assessee in respect of channel placement charges which is in the nature of distribution expenses alleging the same to be sales promotion. He stated that the assessee had to pay money to multi system operators and local cable operators to carry their channels on the desired band. Thus, the payment made by the assessee was for distribution of the channel and it has no relevancy to the advertising or sales promotion. He further stated that the FBT is chargeable in respect of fringe benefit provided by the employer to the employees, whether directly or indirectly. That sub-section (2) of Section 115WB of the Income-tax Act, 1961 provides the deeming provision where the fringe benefit is deemed to have been provided by the employer to the employees in respect of certain expenses. Clause (d) of such sub-section is “sales promotion including publicity”. That the channel placement expenses which are incurred by the assessee for distribution of its channels are by no stretch of imagination in the nature of sales promotion expenses. He further stated that there is no employer employee relationship between the assessee and the recipient of channel placement agencies. Unless there is an employer employee relationship, fringe benefit tax cannot be levied. In support of this contention, he relied upon the CBDT’s Circular No.8 of 2005 dated 29th August, 2005 wherein the provisions relating to fringe benefit tax have been explained by the CBDT. He referred to question No.2 where the CBDT has replied that employer employee relationship is a pre-requisite for levy of FBT. He also relied upon the following decisions:- (i) R & B Falcon (A) Pty.Ltd. Vs. CIT – [2008] 301 ITR 309 (SC). (ii) T & T Motors Ltd. Vs. ACIT – [2012] 341 ITR 332 (Delhi). (iii) Order of the Tribunal dated 27th July, 2012 in ACIT Vs. Turner International India Pvt.Ltd. – ITA No.2125/Del/2012. (iv) ACIT Vs. Tata Consultancy Services Ltd. – [2013] 31 taxmann.com 129 (Mumbai-Trib.). (v) Order 4. Learned counsel, therefore, submitted that the levy of FBT with reference to channel placement expenses may be cancelled. 5. Learned DR, on the other hand, relied upon the orders of authorities below and he stated that Section 115WB(2) is a deeming provision where the Government has provided the levy of fringe benefit in respect of the expenses mentioned therein. That clause (d) of Section 115WB(2) provides sales promotion including publicity. That the Assessing Officer as well as learned CIT(A) has clearly mentioned that the assessee has incurred the expenditure for getting the place in prime band because by this way, channel is noticed and more revenue is generated through advertisement leading to better revenue for the channel. Thus, the expenditure was incurred by the assessee for promoting its channels which is certainly in the nature of sales promotion. In support of this contention, he relied upon the following decisions:- (i) CIT Vs. Zippers India – [2006] 284 ITR 142 (Guj). (ii) CIT Vs. Print System Products – [2000] 243 ITR 8 (Madras). (iii) CIT Vs. Lakhanpal National Ltd. – [2007] 292 ITR 167 (Guj). (iv) CIT Vs. Bata India Ltd. – [1993] 201 ITR 884 (Calcutta). 6. We have carefully considered the arguments of both the sides and perused the material placed before us. Fringe Benefit Tax was levied for the first time by the Finance Act, 2005 by introducing Chapter XII-H i.e. Sections 115W to 115WL to the Income-tax Act, 1961. Section 115WB(2)(d) under which the department has covered the payment of channel place charges reads as under:- “115WB. (2) The fringe benefits shall be deemed to have been provided by the employer to his employees, if the employer has, in the course of his business or profession (including any activity whether or not such activity is carried on with the object of deriving income, profits or gains) incurred any expense on, or made any payment for, the following purposes, namely:- (A) …………….. (B) …………….. (C) …………….. (D) sales promotion including publicity: Provided that any expenditure on advertisement, - (i) being the expenditure (including rental) on advertisement of any form in any print (including journals, catalogues or price lists) or electronic media or transport system; (ii) being the expenditure on the holding of, or the participation in, any press conference or business convention, fair or exhibition; (iii) being the expenditure on sponsorship of any sports event or any other event organized by any Government agency or trade association or body; (iv) being the expenditure on the publication in any print or electronic media of any notice required to be published by or under any law or by an order of a court or tribunal; (v) being the expenditure on advertisement by way of signs, art work, painting, banners, awnings, direct mail electric spectaculars, kiosks, hoardings, bill boards [display of products] or by way of such other medium of advertisement; (vi) being the expenditure by way of payment to any advertising agency for the purposes of clauses (i) to (v) above; [[(vii) being the expenditure on distribution of samples either free of cost or at concessional rate; and] (viii) being the expenditure by way of payment to any person of repute for promoting the sale of goods or services of the business of the employer,] shall not be considered as expenditure on sales promotion including publicity;” 7. From the above, it is evident that Section 115WB(2) is a deeming provision which provides that the fringe benefit shall be deemed to have been provided by the employer to his employee if the employer has incurred the expenses provided in various clauses of the above sub-section. Clause (d) of the above sub-section covers sales promotion including publicity. Proviso to above clause excludes various types of expenditure on advertisement from the purview of clause (d). The assessee has argued that neither there is an employer employee relationship nor the expenditure is in the nature of sales promotion and publicity. In contrast, the learned CIT-DR has stated that if the expenditure as provided in any of the clauses of Section 115WB(2) is incurred by the assessee, the fringe benefit tax would be chargeable, whether or not there is an employer-employee relationship. In this regard, we find that the CBDT has issued Circular No.8 dated 29th August, 2005 which is published in 277 ITR (Statutes) 20. In paragraph 2 of the Circular, objective for introduction of fringe benefit tax is explained which reads as under:- “2. Objective 2.1 The taxation of perquisites or fringe benefits is justified both on grounds of equity and economic efficiency. When fringe benefits are undertaxed, it violates both horizontal and vertical equity. A taxpayer receiving his entire income in cash bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization. Therefore, under-taxation of fringe benefits are violates vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affecting market structure. However, the taxation of fringe benefits raises some problems primarily because – (a) all benefits cannot be individually attributed to employees, particularly in cases where the benefit is collectively enjoyed; (b) of the present widespread practice of providing perquisites, wherein many perquisites are disguised as reimbursements or other miscellaneous expenses so as to enable the employees to escape/reduce their tax liability; and (c) of the difficulty in the valuation of the benefits. 2.2 In India, prior to the assessment year 1998-99, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer based disallowance method where the quantum of the disallowance was estimated on a presumptive basis. In practice, taxation of fringe benefits by the employer-based disallowance method resulted in large scale litigation on account of ambiguity in defining the tax base. Therefore, the taxation of fringe benefits by the employer-based disallowance method was withdrawn by the Finance Act, 1997. However, the withdrawal of the provisions relating to taxation of fringe benefits by the employer-based disallowance method resulted in significant erosion of the tax base. The Finance Act, 2005 has introduced a new levy, namely, the FBT as a surrogate tax on employers, with the objective of resolving the problems enumerated in para. 2.1 above, expanding the tax base and maintaining equity between employers.” 8. At page 25 paragraph 11, frequently asked questions are given. Question No.2 thereof and reply is as under:- “2. Whether employer-employee relationship is a prerequisite for the levy of FBT? Answer : Yes.” 9. Thus, in the Circular issued by the CBDT explaining the newly introduced provisions of FBT, the CBDT itself has clarified that employer-employee relationship is a prerequisite for levy of FBT. Hon’ble Apex Court has considered the above Circular in the case of R & B Falcon (A) Pty.Ltd. (supra) and held as under:- “The interpretation of the CBDT in its circulars being in the realm of executive construction, should primarily be held to be binding, save and except where it violates any provisions of law or is contrary to any judgment rendered by the courts. The reason for giving effect to such executive construction is not only the same as contemporaneous which would come within the purview of the maxim temporania caste pesto, even in a certain situation a representation made by an authority like the Minister presenting the Bill before Parliament may also be found bound thereby. Where a representation is made by the maker of legislation at the time of introduction of the Bill or construction thereupon is put by the executive on its coming into force the same carries great weight.” 10. That the Hon'ble Jurisdictional High Court has also expressed the similar view in the case of T & T Motors Ltd. and held as under:- “A careful reading of clauses (i), (ii), (iv), (v), (vi) and (vii) of section 115WB(2)(D) elucidates that the Legislature has excluded from fringe benefit expenditure in the form of payments to third persons because this is not a fringe benefit which is enjoyed by the “employee/recipient” but it is an expenditure incurred for the purpose of business and in the hands of the recipient the expenditure is taxable as income earned.” 11. That in the case under appeal before us, admittedly, the expenditure was incurred by the assessee for channel placement which is made to third persons and there is no employer-employee relationship between the assessee and the recipient. Therefore, the Circular of the CBDT as well as the decision of Hon’ble Apex Court in the case of R & B Falcon (A) Pty.Ltd. (supra) would be squarely applicable. Moreover, Hon'ble Jurisdictional High Court in the case of T & T Motors Ltd. (supra) has stated that in respect of payment to third persons, FBT is not applicable because no fringe benefit is enjoyed by the employee/recipient. The ratio of the above decision of Hon'ble Jurisdictional High Court would also be squarely applicable to the facts of the assessee’s case because payment had been made for channel placement. By such payment, no fringe benefit is enjoyed by the employee/recipient. The payment is in the nature of expenditure incurred for the purpose of business by the assessee and in the hands recipient, the expenditure is taxable as income. Moreover, the expenditure incurred by the assessee is not in the nature of expenditure for sales promotion. The assessee has incurred the expenditure for broadcasting of its channels on the desired bands. Therefore, the expenditure is for the broadcasting of its channels and not for sales promotion or publicity. 12. The learned DR has relied upon four decisions of various High Courts. However, none of the decisions is on FBT and all the four decisions are with respect to old provisions of Section 37(3A) which was on the statute book between 1st April, 1979 to 1st April, 1981 and then 1st April, 1984 to 1st April, 1986. Incidentally, all the four decisions are against the Revenue. In the case of Zippers India (supra), Hon'ble Gujarat High Court held that the commission paid for local sales as well as for export sales would not be considered as sales promotion expenditure. In the case of Print System Products (supra), Hon'ble Madras High Court held that the commission paid to intermediaries who canvassed the sales was not sales promotion expenditure. In the case of Lakhanpal National Ltd. (supra), Hon'ble Gujarat High Court held that the incentive paid to the sales representatives of the distributors was for the services rendered by them and cannot be considered as expenditure on sales promotion. In the case of Bata India Ltd. (supra), Hon'ble Calcutta High Court held that the discount allowed to wholesale dealers and commission paid to selling agent is not the sales promotion expenditure. Thus, all the four decisions relied upon by the learned DR do not support the case of the Revenue. 13. In view of the above, respectfully following the Circular of the CBDT (supra), the decision of Hon’ble Apex Court in the case of R & B Falcon (A) Pty.Ltd. (supra) and of Hon'ble Jurisdictional High Court in the case of T & T Motors Ltd. (supra), we hold that the channel placement charges cannot be held to be the expenditure on sales promotion or publicity. Therefore, the same cannot be charged to FBT. We, therefore, allow the assessee’s appeals for all the three years. 14. In the result, the appeals of the assessee are allowed. Decision pronounced in the open Court on 12th July, 2013. Sd/- Sd/- (I.C.SUDHIR) (G.D.AGRAWAL) JUDICIAL MEMBER VICE PRESIDENT Dated : 12.07.2013 VK. Copy forwarded to: - 1. Appellant: M/s T.V. Today Network Limited, E-1, Videocon Tower, Jhandewalan Extension, New Delhi – 110 055. 2. Respondent: Deputy Commissioner of Income Tax, Circle-16(1), New Delhi. 3. CIT 4. CIT(A) 5. DR, ITAT Assistant Registrar