A special bench of the Delhi Income Tax Appellate Tribunal has ruled that the income tax that an employer pays on behalf of its employee is a non-monetary benefit in kind and, therefore, exempt from tax.

The tribunal's ruling will benefit multinational companies operating through liaison and sales offices and unregistered Indian companies, some of which are known to bear the tax costs for their employees.

However, registered companies are barred under law from bearing tax costs on behalf of their employees.

The ruling came on a petition of a company called RBF Rig, which paid salaries to some employees net of tax as the employer had borne the taxes.

In the tax returns filed by the employees, tax borne by the employer on the salary paid was considered a non-monetary benefit in kind and as such, exemption from tax was claimed under the Income Tax Act, 1961.

The tax officer and subsequently the commissioner of Income Tax (Appeals) did not allow the exemption on grounds that the tax payment was a monetary benefit in kind. So employees were asked to pay tax on this perk at the applicable rate. The company appealed to the Tribunal against the order.

The special bench overruled two earlier decisions of the Delhi Tribunal, which had held that tax paid by the employer is a monetary payment and did not qualify for exemption.

The bench said since the tax was paid to a third party (the government) and not the employee, it could not be considered a monetary benefit.

"There was some ambiguity in the law as to what could be regarded as a non-monetary benefit in kind. The tribunal ruling will go a long way in bringing certainty into tax payments," said Gaurav Taneja, national tax director, Ernst & Young.

The special bench decision is a binding precedent for tax tribunals.

However, a challenge to this ruling by the Income Tax department cannot be ruled out in a high court.