In an interesting ruling, the Authority for Advance rulings has held that no tax deduction is required to be made for contributions made by Royal Bank of Scotland to its employees Superannuation fund under the “Defined Benefit Model”, as the contribution did not create any vested right in the hands of the employees.
As per section 17(2)(vii) of the Indian Income-tax Act, contributions to Superannuation fund in excess of rupees one lac (approx 1500 USD) per employee are treated as a perquisite to the employee, and consequently liable to be taxed.
To overcome this provision, an argument was made that under the “Defined benefit” model of contribution, the actuarial valuation for the contributions is done on an aggregate basis by an organization for all its employees without identifying the amounts contributed towards a specific employee.
Reliance was also placed on a Supreme Court ruling wherein the Apex Court had ruled that no perquisite arose in the hands of the employee when a contribution is made to a retirement benefit fund, since the employee did not have any vested right in the fund and the right to receive the benefits was contingent on certain events. The key factual aspect to note was that the benefits under the scheme administered by RBS were also contingent on the employee’s termination/resignation after completing a certain number of years in service.
While a similar view relating to taxability of contribution made to employee benefit funds was expressed by the Delhi High Court in another case [Yoshio Kubo Vs CIT], the key distinction in RBS’ case is that contributions by RBS were to a Superannuation Fund established in India, while in Yoshio Kubo’s case the contributions were made to benefit funds set-up in the home country.
The ruling might spawn claims of non-taxability in similar cases where the Superannuation funds are set-up under Defined benefit model. It also opens up a possible planning opportunity for retirement benefit planning for key executives.
While the rulings of the Advance Ruling Authority are binding only on the applicant who sought the ruling, the principle of law could be usefully canvassed in a similar fact pattern obtaining in other cases as well.