The Royal Bank Of Scotland, N.V
Recently, the Authority for Advance Rulings (AAR) in the case of
Royal Bank of Scotland (the Applicant) held that lump sum contribution (based
on actuarial valuation) by the employer to an employee’s Defined Benefit Superannuation
Scheme is not taxable in the hands of each employee.
In its ruling, the AAR has placed reliance on the Supreme Court
ruling in the case ofL.W. Russel and the Delhi High Court rulings in the case
of Mehar Singh Sampuran Singh Chawla and Yoshio Kubo.
Facts of the case:
·
The Applicant is a bank incorporated in the Netherlands and had a
branch office in India which qualifies as a permanent establishment.
·
The Indian branch had established a Defined Benefit Superannuation
Scheme for the purpose of providing pension to its eligible employees.
·
The Scheme was approved under the Income-tax Act, 1961 (the
Act).
·
As per the Accounting Standard 15, under the ‘Defined Benefit Scheme’,
benefits to be received upon retirement are clearly defined in the rules of the
scheme i.e.,employees are assured of their pensions and the risk of generating
enough return lies with the employer.
·
The branch office made a lump sum contribution into the Scheme
based on actuarial valuation. Given the nature of the defined benefit Scheme,
it is not possible to derive the contribution on a per employee basis.
Whether
the lump sum contribution is taxable in the hands of the employees and whether
the employer is required to withhold tax on the same, under Section 192 of the
Act?
AAR’s Ruling:
·
The AAR observed that the employee does not get
a vested right at the time of contribution to the fund by the employer. The amount
standing to the credit of funds like the pension fund,medical or health
insurance would continue to remain invested till the time the employee becomes
entitled to receive it.
·
The AAR relied on the Supreme Court ruling in
the case of L.W. Russel and held that the employee must have a vested right in
the amount, and contingent payments to which the employee has no right till the
time contingency occurs,cannot be taxable.In other words, where the amount does
not result in direct present benefit, but assures the employee of a future
benefit, in event of contingency , the payment made by the employer does not
vest in the employee.
·
The AAR also relied on the Delhi High Court
rulings in the case of Mehar Singh Sampuran Singh Chawla and Yoshio Kubo in
this regard.
·
Thus, the AAR in the subject ruling, held that the
employer’s contribution to the Scheme is not taxable in the hands of the
employees. Accordingly, the employer is not obliged to withhold any tax on the
lump sum payment to the concerned superannuation fund
Conclusion:
Section
17(2)(vii) of the Act specifies that the amount of any contribution to an
approved superannuation fund by the employer in respect of the employe e, to
the extent it exceeds INR 1 lakh,is to be
considered as a taxable perquisite in the hands of the employee.
However,
an issue arises in a Defined Benefit Scheme where any lump sum contribution by
the employer to the superannuation fund, cannot be allocated to each employee superannuation
fund account.The present decision of the AAR offers some guidance on this
issue, whereby the AAR has held that such lump sum contributions (based on
actuarial valuation) should not be taxed in the hands of the employees.
Even
though the decision of the AAR is legally binding, only on the parties involved
in a particular case, the ruling would have a persuasive value in similar
matters before the Indian tax authorities and courts.
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