Supreme Court in this decision has disposed of 104 cases (amongst them were Eli Lilly & Co. (India) (P) Ltd., Ericsson Communication (P) Ltd., Mitsui & Company Ltd. pertaining to the applicability of TDS on salary paid to expatiates in their home country by the foreign employer.
Facts of the case:
Eli Lilly & Co. (India) (P) Ltd.
Eli Lilly Inc. Netherland (Foreign Company) had a Joint Venture with Ranbaxy Ltd., in the form of Eli Lilly & Co. (India) (P) Ltd. (Indian Company). Foreign Company has seconded four expatriates to Indian Company. Expats continue to be on roll of foreign company and received salary from Indian company in India as well as from foreign company in home country. These expats did not perform any services for the foreign company and total remuneration (in India & in foreign) was paid only on account of services rendered in India. TDS u/s 192 was deducted only on that part of the salary paid in India by the Indian company. However expats have paid taxes due on home salary by way of advance tax or self-assessment tax.
The Assessing Officer held that Indian company as ‘assessee-in-default’ u/s 201 for failure to deduct tax at source on foreign / home salary paid by foreign company outside India and levied interest u/s 201(1A).
Ericsson Communication (P) Ltd.
Similarly in this case too Swedish Company has paid ‘child education payment’ to its expatriate employees in Sweeden on which no TDS was deducted by the Indian Company.
Mitsui & Company Ltd.
Mitsui & Company Ltd. (Foreign Head Office) had a project & liaison office in India. Foreign Head Office has deputed some of its employees to project & liaison office in India. As per the terms of deputation expats also received retention / continuation salary paid by the foreign Head Office in home country. TDS was deducted only on that part of salary which was paid by project & liaison office. However after consultation with CBDT, project & liaison office has agreed to pay tax & interest on retention continuation salary with the understanding that there will not be any penalty proceedings.
However the Assessing Officer has levied penalty u/s 271C against project and liaison office in India for alleged default of Foreign Head Office
Lower appellate authorities has held in favour of the assessees that assessee (Indian Counter part) were not under statutory obligation to deduct tax at source u/s 192 on Home Salary paid by Foreign Company and consequently they are also not ‘assessee-in-default’ u/s 201(1) and where department has levied penalty u/s 271C, penalty was deleted. Against all these 104 cases department was in appeal before Supreme Court.
Issue before Supreme Court
Whether TDS provisions are applicable in respect of payments, which are chargeable under the head ‘Salaries’, made by the foreign company in home country, to expatriates who render services in India?
While answering above, the Court has also analysed following:
a) Whether TDS provisions which are in the nature of machinery provisions are independent of charging provisions?
b) Scope of ‘Salary’ u/s 192(1)?
c) Scope of section 201(1) treating assessee-in-default and section 201(1A) levy of interest?
d) Scope of section 271C r.w.s. 273B for levy of penalty on non-deduction of tax at source?
Argument of Revenue
S. 192, imposes an obligation for deducting tax on any person responsible for paying any income chargeable under the head “Salary”. The expression ‘any person’ would include any person, responsible for making salary payment to an employee, whether the employee is in India or outside India or whether payment is made in India or outside India. The only requirement for triggering TDS provisions is that employee is paid for rendering services in India and accordingly such salary is exigible to Indian income-tax.
S. 192, imposes a joint and several obligation on all the persons who are responsible for paying any income chargeable under the head ‘Salary’ to an assessee employee in India.
Alternatively, it was also argued that in view of amendment to S. 9(1)(ii), the obligation of Indian employer is co-extensively with the foreign employer (who is directly paying the foreign account of the expatriate employee outside India) as long as the salary income of such an employee arises or accrues in India or is in respect of ‘services rendered in India’.
With respect to penalty, assesses plea of bona fide misunderstanding of law does not withstand the test of ‘reasonable cause’ so as to delete penalty.
Argument of Assessee
The obligation to deduct tax at source is on the person responsible for paying salary. Accordingly, deduction of tax at source is qua the amounts actually paid by the employer or paid on his behalf or on his account.
The payment of salary by the foreign company was not on behalf of or on account of Indian employer.
The obligation to deduct tax at source does not extend in respect to salaries paid by any other person, which is not on account of or on behalf of such employer, even though such salaries may have nexus with the service of the employee with that employer and may be assessable to tax in India in the hand of employee.
In respect of consecutive and concurrent employment, unless employee furnishes details of such employment, TDS is required to be deducted without considering salary paid by another employer.
The TDS provisions are in nature of machinery provisions to enable easy collection and recovery of tax and are independent of charging provisions. Charging provision are applicable to receiver of income and TDS (machinery) provisions are applicable to payer of income.
The obligation to deduct tax at source is on deductor, which is independent of the assessment of income in the hands of the expatriate employee.
TDS provisions have no extra-territorial operation. There is no provisions in the income-tax Act providing TDS provisions applicable to payments made abroad by a person located outside India.
Employees have discharged tax liability on home salary either by way of advance tax or self assessment tax and has also filed return of income. Accordingly even if assessee is treated as assessee-in-default, the tax cannot be recovered again from the assessee since employee has paid the tax.
Indian employers were under bona fide impression that it was not required to deduct at source and such bona fide belief constitutes ‘reasonable cause’ for non levey of penalty.
Held
The scheme of the TDS provisions applies not only to the amounts paid, which bears the character of ‘income’ such as salaries, dividend, interest on securities etc. but also apply to gross sums, the whole of which may not be income or profits in the hands of the recipient, such as payment to contractors and sub-contractors. The purpose of TDS provisions is to see that the sum which is chargeable u/s 4 for levy and collection on income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to non-resident.
If the payments of the home salary paid abroad by the Foreign Company to the expatriate has any connection or nexus with rendition of services in India then such payment would constitute income which is deemed to accrue or arise to employee in India as salary earned in India in view of S. 9(1)(ii).
S. 9(1) integrates the charging sections, the computation provisions as well as machinery provisions.
Income-tax Act has extra-territorial operation in respect of subject matters and the subjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the Area where Act extends through the machinery provided under it.
Salary TDS provisions is a stand alone section amongst other TDS provisions (Chapter XVII-B), which has to be read with section 9(1)(ii).
Supreme Court concluded that-
o In generality it cannot be said that the TDS provisions are in nature of machinery provisions to enable collection and recovery of tax and are independent of the charging provisions.
o Home Salary payments made by the foreign company in foreign currency abroad can be held to be ‘deemed to accrue or arise in India’ depending upon the facts in each case.
On facts, it was held that home salary / special allowance payment made by the foreign company abroad is for rendition of services in India and no work was found to have been performed for the foreign company, would to subject to TDS u/s 192(1) r.w.s. 9(1)(ii).
Scope of S. 201(1) & S. 201(1A)
Provision of S. 201(1) treating assessee-in-default and payment of interest u/s 201(1A) are independent to each other. Object of s. 201 is to recover that tax and incase of short deduction of tax, recover the shortfall. Interest u/s 201(1A) is compensatory measure for withholding tax which ought to have gone to the exchequer. The levy of interest is mandatory and absence of liability for tax will not dilute the default.
Interest u/s 201(1A) r.w.s. 201(1) can only be levied when a person is declared as an assessee-in-default.
Interest is levied for the period of default, which is period between the date of deductibility and date of actual payment of tax.
In case tax is directly paid by the employee (who is principally liable to pay tax) Indian company would be liable to pay interest from the date of deductibility of tax to the date of actual payment by concern expatriate employees.
Scope of S. 271C r.w.s. 273B
Penalty u/s 271C which, is equal to the amount of tax, is leviable if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVIIB.
S. 273B provided that no penalty can be levied on the person for failure to deduct tax at source if such person proves that there was a reasonable cause for the failure.
Court cancelled the levy of penalty on following counts:
o Non-deduction of tax at source took place on account of controversial addition. The concept of aggregation or consolidation of the entire income chargeable under the head ‘salary’ being exigible to deduction of tax at source u/s 192 was a nascent issue and this was never considered by the Supreme Court.
o Assessee has not claimed deduction u/s 40(a)(iii) while computing income from business and hence paid higher corporate tax and in some cases the expatriate employees had directly paid tax on such home salary.
o Deductor has been bona fide belief that they were under no obligation to deduct tax at source on such home salary.
Conclusion
Supreme Court widens the scope of the withholding of taxes from salary. Accordingly withholding provision u/s 192 are triggered in respect of the amounts which are exigible under the head ‘Salaries’ irrespective to place of payment. In other words all Indian companies who has deputes from foreign sister / associate company will have to deduct the tax on global salary, which relates to services rendered in India, during their deputation in India.
In view of this decision every foreign company who has deputed their employees in India, would be required to reassess their fact pattern so as to determine there withholding tax liability in India.
However said judgment will not have applicability in case of non deduction of tax at source other than salary since Supreme Court has categorically elucidate that this judgement is confined strictly to the question of deductibility of tax from the ‘income chargeable under the head salaries u/s 192(1)
PS: Analysis published in CTC's IT Review
Facts of the case:
Eli Lilly & Co. (India) (P) Ltd.
Eli Lilly Inc. Netherland (Foreign Company) had a Joint Venture with Ranbaxy Ltd., in the form of Eli Lilly & Co. (India) (P) Ltd. (Indian Company). Foreign Company has seconded four expatriates to Indian Company. Expats continue to be on roll of foreign company and received salary from Indian company in India as well as from foreign company in home country. These expats did not perform any services for the foreign company and total remuneration (in India & in foreign) was paid only on account of services rendered in India. TDS u/s 192 was deducted only on that part of the salary paid in India by the Indian company. However expats have paid taxes due on home salary by way of advance tax or self-assessment tax.
The Assessing Officer held that Indian company as ‘assessee-in-default’ u/s 201 for failure to deduct tax at source on foreign / home salary paid by foreign company outside India and levied interest u/s 201(1A).
Ericsson Communication (P) Ltd.
Similarly in this case too Swedish Company has paid ‘child education payment’ to its expatriate employees in Sweeden on which no TDS was deducted by the Indian Company.
Mitsui & Company Ltd.
Mitsui & Company Ltd. (Foreign Head Office) had a project & liaison office in India. Foreign Head Office has deputed some of its employees to project & liaison office in India. As per the terms of deputation expats also received retention / continuation salary paid by the foreign Head Office in home country. TDS was deducted only on that part of salary which was paid by project & liaison office. However after consultation with CBDT, project & liaison office has agreed to pay tax & interest on retention continuation salary with the understanding that there will not be any penalty proceedings.
However the Assessing Officer has levied penalty u/s 271C against project and liaison office in India for alleged default of Foreign Head Office
Lower appellate authorities has held in favour of the assessees that assessee (Indian Counter part) were not under statutory obligation to deduct tax at source u/s 192 on Home Salary paid by Foreign Company and consequently they are also not ‘assessee-in-default’ u/s 201(1) and where department has levied penalty u/s 271C, penalty was deleted. Against all these 104 cases department was in appeal before Supreme Court.
Issue before Supreme Court
Whether TDS provisions are applicable in respect of payments, which are chargeable under the head ‘Salaries’, made by the foreign company in home country, to expatriates who render services in India?
While answering above, the Court has also analysed following:
a) Whether TDS provisions which are in the nature of machinery provisions are independent of charging provisions?
b) Scope of ‘Salary’ u/s 192(1)?
c) Scope of section 201(1) treating assessee-in-default and section 201(1A) levy of interest?
d) Scope of section 271C r.w.s. 273B for levy of penalty on non-deduction of tax at source?
Argument of Revenue
S. 192, imposes an obligation for deducting tax on any person responsible for paying any income chargeable under the head “Salary”. The expression ‘any person’ would include any person, responsible for making salary payment to an employee, whether the employee is in India or outside India or whether payment is made in India or outside India. The only requirement for triggering TDS provisions is that employee is paid for rendering services in India and accordingly such salary is exigible to Indian income-tax.
S. 192, imposes a joint and several obligation on all the persons who are responsible for paying any income chargeable under the head ‘Salary’ to an assessee employee in India.
Alternatively, it was also argued that in view of amendment to S. 9(1)(ii), the obligation of Indian employer is co-extensively with the foreign employer (who is directly paying the foreign account of the expatriate employee outside India) as long as the salary income of such an employee arises or accrues in India or is in respect of ‘services rendered in India’.
With respect to penalty, assesses plea of bona fide misunderstanding of law does not withstand the test of ‘reasonable cause’ so as to delete penalty.
Argument of Assessee
The obligation to deduct tax at source is on the person responsible for paying salary. Accordingly, deduction of tax at source is qua the amounts actually paid by the employer or paid on his behalf or on his account.
The payment of salary by the foreign company was not on behalf of or on account of Indian employer.
The obligation to deduct tax at source does not extend in respect to salaries paid by any other person, which is not on account of or on behalf of such employer, even though such salaries may have nexus with the service of the employee with that employer and may be assessable to tax in India in the hand of employee.
In respect of consecutive and concurrent employment, unless employee furnishes details of such employment, TDS is required to be deducted without considering salary paid by another employer.
The TDS provisions are in nature of machinery provisions to enable easy collection and recovery of tax and are independent of charging provisions. Charging provision are applicable to receiver of income and TDS (machinery) provisions are applicable to payer of income.
The obligation to deduct tax at source is on deductor, which is independent of the assessment of income in the hands of the expatriate employee.
TDS provisions have no extra-territorial operation. There is no provisions in the income-tax Act providing TDS provisions applicable to payments made abroad by a person located outside India.
Employees have discharged tax liability on home salary either by way of advance tax or self assessment tax and has also filed return of income. Accordingly even if assessee is treated as assessee-in-default, the tax cannot be recovered again from the assessee since employee has paid the tax.
Indian employers were under bona fide impression that it was not required to deduct at source and such bona fide belief constitutes ‘reasonable cause’ for non levey of penalty.
Held
The scheme of the TDS provisions applies not only to the amounts paid, which bears the character of ‘income’ such as salaries, dividend, interest on securities etc. but also apply to gross sums, the whole of which may not be income or profits in the hands of the recipient, such as payment to contractors and sub-contractors. The purpose of TDS provisions is to see that the sum which is chargeable u/s 4 for levy and collection on income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to non-resident.
If the payments of the home salary paid abroad by the Foreign Company to the expatriate has any connection or nexus with rendition of services in India then such payment would constitute income which is deemed to accrue or arise to employee in India as salary earned in India in view of S. 9(1)(ii).
S. 9(1) integrates the charging sections, the computation provisions as well as machinery provisions.
Income-tax Act has extra-territorial operation in respect of subject matters and the subjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the Area where Act extends through the machinery provided under it.
Salary TDS provisions is a stand alone section amongst other TDS provisions (Chapter XVII-B), which has to be read with section 9(1)(ii).
Supreme Court concluded that-
o In generality it cannot be said that the TDS provisions are in nature of machinery provisions to enable collection and recovery of tax and are independent of the charging provisions.
o Home Salary payments made by the foreign company in foreign currency abroad can be held to be ‘deemed to accrue or arise in India’ depending upon the facts in each case.
On facts, it was held that home salary / special allowance payment made by the foreign company abroad is for rendition of services in India and no work was found to have been performed for the foreign company, would to subject to TDS u/s 192(1) r.w.s. 9(1)(ii).
Scope of S. 201(1) & S. 201(1A)
Provision of S. 201(1) treating assessee-in-default and payment of interest u/s 201(1A) are independent to each other. Object of s. 201 is to recover that tax and incase of short deduction of tax, recover the shortfall. Interest u/s 201(1A) is compensatory measure for withholding tax which ought to have gone to the exchequer. The levy of interest is mandatory and absence of liability for tax will not dilute the default.
Interest u/s 201(1A) r.w.s. 201(1) can only be levied when a person is declared as an assessee-in-default.
Interest is levied for the period of default, which is period between the date of deductibility and date of actual payment of tax.
In case tax is directly paid by the employee (who is principally liable to pay tax) Indian company would be liable to pay interest from the date of deductibility of tax to the date of actual payment by concern expatriate employees.
Scope of S. 271C r.w.s. 273B
Penalty u/s 271C which, is equal to the amount of tax, is leviable if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVIIB.
S. 273B provided that no penalty can be levied on the person for failure to deduct tax at source if such person proves that there was a reasonable cause for the failure.
Court cancelled the levy of penalty on following counts:
o Non-deduction of tax at source took place on account of controversial addition. The concept of aggregation or consolidation of the entire income chargeable under the head ‘salary’ being exigible to deduction of tax at source u/s 192 was a nascent issue and this was never considered by the Supreme Court.
o Assessee has not claimed deduction u/s 40(a)(iii) while computing income from business and hence paid higher corporate tax and in some cases the expatriate employees had directly paid tax on such home salary.
o Deductor has been bona fide belief that they were under no obligation to deduct tax at source on such home salary.
Conclusion
Supreme Court widens the scope of the withholding of taxes from salary. Accordingly withholding provision u/s 192 are triggered in respect of the amounts which are exigible under the head ‘Salaries’ irrespective to place of payment. In other words all Indian companies who has deputes from foreign sister / associate company will have to deduct the tax on global salary, which relates to services rendered in India, during their deputation in India.
In view of this decision every foreign company who has deputed their employees in India, would be required to reassess their fact pattern so as to determine there withholding tax liability in India.
However said judgment will not have applicability in case of non deduction of tax at source other than salary since Supreme Court has categorically elucidate that this judgement is confined strictly to the question of deductibility of tax from the ‘income chargeable under the head salaries u/s 192(1)
PS: Analysis published in CTC's IT Review
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