Introduction
1.1 A person responsible for making certain payments [Payer] to a resident or a non-resident (Payee) is required to deduct tax (TDS) as provided in various provisions contained in Chapter XVIIB of the Income-Tax Act, 1961 (the Act). In the last few years, the net of TDS is substantially widened from time to time by the Government and large number of payments are now covered within those provisions. A large portion of direct tax collection is made by the Government through TDS provisions.
1.2 Out of the collections made by the Government by way of TDS, a major portion of the collection represents the TDS from salary income. Sec.192(1) provides that any person responsible for paying (Employer) any income chargeable under the head ‘Salaries’ [hereinafter referred to as Salary Income], at the time of payment, is required to deduct tax on the estimated Salary Income of the assessee (Employee) for relevant financial year as provided in the Section. Such Employee could be resident or non-resident. The only criterion is taxability of Salary Income under the Act. Such tax is required to be deducted at an average rate of Income-tax as provided in the Section. Sec.192(2) further provides that if the assessee (Employee) is employed simultaneously under more than one employer during the financial year, etc., he may furnish to the Employer referred to in Sec.192(1) such details of his Salary Income from the other employer or employers in the prescribed form (Form No.12B) and in that event, such Employer is under an obligation to take into account such details for the purpose of making deduction under Sec.192(1). The provisions contained in Sec.192(2) are regarded as optional for the assessee (Employee).
1.3 When a non-resident (say, a Foreign Company) makes payment outside India to any resident (or to non-resident in certain cases) falling within any of the provisions contained in Chapter XVIIB, then in such a case, whether such a non-resident also is required to deduct tax or not is a matter which is currently under debate on the ground as to whether such machinery provisions of the Act can be applied beyond the territories of India [i.e., on the ground of extra-territorial jurisdiction]. The Department holds the view that in such an event, even such a non-resident making payment outside India is required to deduct tax and comply with the provisions of the Act with regard to TDS. This view of the Department is also reflected in some of the Circulars issued by the CBDT [e.g., Circular No.726, dated 18.4.1995, under which certain exceptions for TDS are provided for payments made by non-residents to resident Payees, being lawyers, chartered accountants, etc.].
1.4 In many cases, a Foreign Company enters into joint venture with an Indian partner in respect of some business activities for which a company is incorporated in India jointly with the resident joint venture partner [J. V. Company or Indian Company]. Similarly, many a time, a Foreign Company incorporates a subsidiary company in India for carrying out certain business activities [Indian Company]. In such cases, many a time, such Foreign Company deputes its employees on secondment basis to such Indian Company and the expatriates so seconded remain in India for a specified period in the employment of the Indian Company (generally such expatriates also become resident in India under the Act during such a period). In such cases, the Indian Company makes payment of salary, etc. and deducts tax under Sec.192(1) in respect of such payments. At the same time, in many such cases, such expatriates seconded by the Foreign Company to the Indian Company retain their lien on their job with the Foreign Company and also continue to remain on the rolls of the Foreign Company, and, apart from the salary, etc. received from the Indian Company, they also receive the agreed remuneration outside India in foreign currency from such Foreign Company (Home Salary). In such cases, no reimbursement is made by the Indian Company in respect of such Home Salary received by the expatriates and the same is also not claimed as deduction in computing the taxable income of the Indian Company. In such cases, the issue with regard to taxability of such Home Salary in India is under debate, which has to be decided on the basis of facts and circumstances of each case. In cases where such Home Salary is related to the services rendered by such expatriates in India, the same is generally treated as taxable income in India and in such an event, further issue with regard to liability of TDS in respect of such Home Salary is also under debate. In many cases, the Department has taken a stand that since such Home Salary relates to services rendered in India, the same is deemed to have accrued or arisen in India under Sec.9(1)(ii) and accordingly, the Indian Company is liable to deduct tax under Sec.192(1), as no work is performed by such expatriates for the Foreign Company during such periods.
1.5 Recently, the Apex Court had occasion to consider the issues referred to hereinbefore in the case of Eli Lilly & Co. India Pvt. Ltd. [Civil Appeal No.5114/2007] and other cases. Therefore, the judgment of the Apex Court in this batch of cases is of great importance and hence, it is thought fit to consider the same in this column.
Eli Lilly & Co. India Pvt. Ltd. and Others —178 Taxmann 505 (SC).
2.1 In the above cases (taken up by the Apex Court together), the Home Salary was paid by a Foreign Company to its employees seconded to the Indian Company [which was also not reimbursed by’ the Indian Companies 1, no tax was deducted on such payments. The Indian Companies had deducted tax under Sec.192 in respect of Salary Income paid by them to such seconded expatriates. In some cases, the employees had filed their returns of income in India and paid taxes on the Home Salary. In some cases, it seems, initially, a stand was taken that Home Salary is not taxable in India, but it appears that subsequently such stand was given up and taxes were paid. Since a large number of cases were involved, the detailed facts in respect of each one of those cases are not available except for one case to which reference is made hereinafter. Primarily, it seems that in all cases, the Indian Companies were treated as ‘assessee-in-default’ under Sec.201 and interest was charged under Sec.201(lA) and in some cases, penalty under Sec.271C was also levied for non-deduction of tax. It seems that in all cases, the High Court had decided these issues in favour of the Indian Companies.
2.2 In the case of Mis. Eli Lilly & Co. India Pvt. Ltd. (Indian Company), the brief facts were: The Company was engaged in manufacturing and selling pharmaceutical products during the Financial Years 1992-93 to 1999-2000. The Company was a J. V. Company between Messrs. Eli Lilly Inc., Netherlands (Foreign Company) and its Indian Partner, Mis. Ranbaxy Ltd. The Foreign Company had seconded four expatriates to the Indian Company (i.e., J. V. Company) and the appointment was routed through a J. V. Board consisting of Indian Partner and the Foreign Company. Only a part of their aggregate remuneration was paid in India by the Indian Company on which tax was deducted under Sec.192(1). These expatriates, who were seconded by the Foreign Company to the J. V. Company in India, also continued to be on the rolls of the Foreign Company and they received Home Salary outside India in foreign currency from the said Foreign Company, on which no tax was deducted. A survey under Sec.133(A) was carried out and in the course of such survey, these facts were noticed. The post-survey operations revealed that those expatriates who were employed by the Indian Company (on being seconded by the Foreign Company), no work was performed by them for the Foreign Company. Based on these facts, the Assessing Officer (A.a.) found that total remuneration paid to them was only on account of services rendered in India and therefore, the same is taxable in India in terms of Sec.9(1)(ii), and accordingly subject to tax deduction under Sec.192(1) of the Act. It was the contention of the Indian Company that the Home Salary is paid by the Foreign Company to expatriates outside India, de hors the contract of employment in India. The A.a. treated the Indian Company as ‘assessee-in-default’ under Sec.201 in respect of Home Salary paid by the Foreign Company outside India and levied interest under Sec.201(lA). In the Appellate proceedings, the Tribunal and the High Court took a view that the Indian Company was not under statutory obligation to deduct tax under Sec.192 on the Home Salary paid by the Foreign Company, as it was not paid by the Indian Company and hence it is not an ‘assessee-in-default’. At the instance of the Department, the matter came up before the Apex Court and the Apex Court decided to dispose of this case as well as other cases involving similar issues together.
2.3 On behalf of the Revenue, it was submitted that Sec.192 comprises the following four elements:
i) It imposes an obligation of ‘deducting’ tax on ‘any person’ responsible for paying any income chargeable under the head ‘salary’,
ii) Clarifies that this obligation attaches itself ‘at the time of payment’, which is the temporal time-frame,
iii) The rate is to be determined on the basis of the average rate of Income-tax for the financial year, and
iv) Most importantly, the rate is to be applied ‘on the estimated income of the assessee under this head for that financial year’, i.e., for the totality of the assessable salary income of the assessee-employee.
2.3.1 On behalf of the Department, it was, inter alia, further contended that the expression ‘any person’ in Sec.192 would include any person responsible for making salary payment to an employee, whether such employee is in India or outside India or whether such payment is made in india or outside India. The only requirement is that the assessee employee must be paid in respect of services rendered in India. A reference was also made in Sec.192(2) to draw a distinction between the expressions, ‘making the payment’ and ‘making the deduction’. With this distinction, it was contended that the very fact that Sec.192(2) authorises the employee to choose one of the several persons ‘making the payment’ and not ‘making the deduction’ is an indication that the obligation under Sec.192(1) attaches to ‘any’ person, who is responsible for making payment of Salary Income and is not limited to a person, who is under an obligation to deduct tax at source. It was finally contended that Sec.192 imposes a joint and several obligation on all the persons, who are responsible for paying any Salary Income to employees in India. In the alternative, it was contended that if it is held that it is only Indian Employer who is obliged to deduct tax at source and not the foreign employer (who is directly paying to the foreign account of the employee outside India), the obligation of the Indian employer has to be interpreted co-extensively and in respect of the entire Salary Income of the employees, so long as such Salary Income of the employee arises or accrues in India or is in respect of ‘services rendered in India’.
2.3.2 With regard to the issue relating to penalty under Sec.271C, on behalf of the Department it was contended that such penalty is in the nature of civil liability. The burden of bringing the case within the exception provided in Sec.273B, namely, showing ‘reasonable cause’, is squarely on the assessee. It was pointed out that in these appeals, the assessee has pleaded bona fide misunderstanding of law, which explanation does not satisfy the test of ‘reasonable cause’ and therefore, merits rejection.
2.4 The counsel appearing on behalf of Mis. Eli Lilly & Co. India Pvt. Ltd. [i.e., an Indian Company] raised various contentions. The Indian Company (which is Employer in India) was under no obligation to deduct tax under Sec.192(1) from the Home Salary, which was admittedly not paid by it. Sec.192(1) obliges the Employer to deduct tax out of the esti-mated salary income at the time of making payment thereof. Such TDS is required on estimated income for the reason that Salary Income is liable to change during the year on account of various reasons, such as increment, pay revision, payment of bonus, D.A., valua-tion of perquisites in kind, etc. Unlike most of the other provisions, TDS is required under Sec.192(1) at the time of payment of salary, the obligation of Employer is to deduct tax qua the amount actually paid by the Employer or paid on his behalf or on his account. Sec.192(2) specifically provides that when the employee is simultaneously in employment of more than one employer, the employee has an option to file with one employer (the chosen employer), a declaration of salary earned by him in Form No.12B and in that event, such chosen em-ployer is under an obligation to deduct tax on aggregate Salary Income of the employee. In the absence of exercise of option under Sec.192(2), the obligation of each employer is confined to the amount of salary actually paid by him and there is no statutory obligation on one employer to take into account the salary paid by other employer for the purpose of TDS. The TDS provisions are in the nature of machinery provisions, which enable easy col-lection and recovery of tax and the same are independent of charging provisions which are applicable to the recipients of income, whereas the IDS provisions are applicable to the Payer of income. The obligation of IDS on the Payer is independent of assessment of income in the hands of all the expatriate employees and hence the employer is obliged to deduct tax at source only from the payment made by him or payment made on his behalf or on his account. Each employer is required to comply with the TDS obligations in respect of Salary Income paid by him and the obligation does not extend to deduct tax out of Salary Income paid by other persons, when it is not on account of or on behalf of such employer, notwithstanding the fact that such salaries may have nexus with the service of the employee with the employer (Indian Company) and may be assessable to tax in India in the hands of the recipient employee. The payment of Home Salary by the Foreign Company in Netherlands was not on behalf of or on account of the Indian Company and consequently, the Indian Company was not under a statutory obligation to deduct tax from the entire Salary Income of the expatri-ate including Home Salary, particularly when the expatriates did not exercise an option under Sec.192(2) requiring the Indian Company to deduct tax from their aggregate Salary Income. It was also pointed out that each of the expatriate employees had paid directly the tax due on the Home Salary by way of advance taxi self-assessment tax from time to time and they had also filed their returns of income in India. In view of this, there is no loss to the Revenue of the alleged default of not deducting tax on the entire Salary Income as on account of short deduction of tax and hence, even if the Indian Company is regarded as ‘assessee-in-default’ in terms of Sec.201 of the Act, the tax alleged to be in default cannot be once again recovered from the Indian Company.
2.4.1 The counsel appearing on behalf of another Indian Company [M/ s. Erection Communica-tions Pvt. Ltd.] raised various contentions.
These include contentions with regard to the issue that such TDS provisions have no extra-territorial operations. In this regard it was, inter alia, submitted: there is no provision in the Act that TDS provisions shall apply to payment made abroad by a person who is located outside India, breach of such provisions results in severe penal and criminal action and therefore, penal and criminal liability imposition by a statute on foreigners in respect of their acts and omissions committed outside India should not be inferred unless there is a clear-cut provision in the Act to that effect, applicability of TDS provisions to payment made abroad has nothing to do with the taxability of such amount in India, there are various instances where the amounts paid outside India by a foreigner are taxable in India, but such payments are not subject to TDS provisions, etc. Dealing with the provisions of Sec.192(1), it was contended that the same can be divided into two distinct parts. First part creates a legal liability to deduct tax and the second part provides for computation of the amount of tax to be deducted. On a plain and correct reading of the provisions creating liability to deduct tax, the tax is deductible only from the amount paid or payable by the Payer and he is not at all required to deduct tax in respect of the amount paid by any other person. The second part of the provision also refers to only estimated Salary Income of the employee for the whole financial year on the basis of payment made by the Payer (Employer). Other contentions raised were similar to those raised by the earlier counsel.
2.4.2 Another counsel appearing on behalf of M/ s. Mitsui & Co. Ltd. also raised similar contentions. However, his main thrust was with regard to penalty imposed under Sec.271C. It was contended that the retention/continuation payment made to expatriates in Japan by Head Office (H.O.) of the Company was not taxable in India and/ or TDS provisions are not applicable to such payments. It was further stated that the Company had presented its case before the Department to this effect. However, after consultation with CBDT, it was agreed to pay the tax and accordingly the amount of tax and interest was deposited on the understanding that there will not be any penalty proceeding. Accordingly, both in law and on facts, the Department had erred in imposing penalty. To support his legal stand with regard to non-taxability of the amount also, various contentions were raised with reference to the provisions contained in Sec.9(1)(ii) as well as the Explanation introduced by the Finance Act, 1983 (w.ef 1.4.1979) and another Explanation introduced by the Finance Act, 1999 (w.ef 1.4.2000), to ultimately contend that despite the amendment made by the Finance Act, 1983, a salary paid for ‘off-period’ was not covered in the provisions and hence another amendment was made, which is prospective in nature. In effect, it seems that an attempt was made to show that taxability of such amount was debatable. The difference between the Branch (Branch Office) on the one hand and H.O. on the other hand recognised for the purpose of implementing TDS provisions was also brought out as, in this case, the expatriates were working at the Project Office in India and were getting salary for rendering services in India and at the same time, they were also getting continuation/retention payments (Home Salary) from the H.O. in Japan.
2.4.3 The Court also noted that the other counsels appearing for various other assessees have adopted the arguments taken up by the earlier counsels.
