Commr. of Income
Tax,New Delhi Vs. M/S Eli Lilly & Company (India) P.Ltd. [2009] INSC 617
(25 March 2009)
Judgment
CIVIL APPELLATE
JURISDICTION CIVIL APPEAL No. 5114/2007 Commissioner of Income-tax, New Delhi
... Appellant(s) versus M/s Eli Lilly & Company (India) Pvt. Ltd. ...
Respondent(s) with C.A.No.5152/2005, C.A.No.1775/2006, C.A.No.1782/2006,
C.A.No.1776/2006, C.A.No.1778/2006, C.A.No.1780/2006, C.A.No.1786/2006,
C.A.No.1783/2006, C.A.No.1785/2006, C.A.No.1787/2006, C.A.No.1789/2006, C.A.No.1791/2006,
C.A.No.1792/2006, C.A.No.1793/2006, C.A.No.1794/2006, C.A.No.1795/2006,
C.A.No.1796/2006, C.A.No.1784/2006, C.A.No.1920/2006, C.A.No.2187/2006,
C.A.No.2211/2006, C.A.No.2210/2006, C.A.No.2480/2006, C.A.No.5263/2006,
C.A.No.5646/2006, C.A.No.107/2007, C.A.No. 347/2007, C.A.No.161/2007,
C.A.No.159/2007, C.A.No.156/2007, C.A.No.352/2007, C.A.No.428/2007,
C.A.No.434/2007, C.A.No.342/2007, C.A.No.344/2007, C.A.No.343/2007,
C.A.No.345/2007, C.A.No.346/2007, C.A.No.349/2007, C.A.No. 816/2007, C.A.No.1348/2007,
C.A.No.1357/2007, C.A.No.1345/2007, C.A.No.1355/2007, C.A.No.1352/2007,
C.A.No.1351/2007, C.A.No.1354/2007, C.A.No.1346/2007, C.A.No.1343/2007, C.A.No.
2295/2007, C.A.No.2293/2007, C.A.No.1634/2007, C.A.No.1956/2007,
C.A.No.1948/2007, C.A.No.1943/2007, C.A.No.1939/2007, C.A.No.1961/2007, C.A.No.
2121/2007, C.A.No.2294/2007, C.A.No.2292/2007, C.A.No. 4173/2007,
C.A.No.4516/2007, C.A.No.4517/2007, C.A.No.3212/2007, C.A.No.3124/2007,
C.A.No.3126/2007, C.A.No. 5110 - 5111/2007, C.A.No. 264/2008, C.A.No. 293/2008,
C.A.No. 292/2008, C.A.No.4477/2007, C.A.No.4082/2007, C.A.No.1037/2008,
C.A.No.3523/2007, C.A.No.1462/2008, C.A.No.5288/2007, C.A.No.5295/2007,
C.A.No.5986/2007, C.A.No.5742/2007, C.A.No.5749/2007, C.A.No.3587/2008,
C.A.No.3616/2007, C.A.No.1769/2006, C.A.No. 1890/2009 @ LP(C)No.21443/2006, 1 C.A.
No. 1891/2009 @ SLP(C)No. 3768/2007, C.A. No. 1892/2009 @ SLP(C)No. 3769/2007,
C.A. No. 1893/2009 @ SLP(C)No. 3770/2007, C.A. No. 1894/2009 @ SLP(C)No.
3771/2007, C.A. No. 1895/2009 @ SLP(C)No. 3946/2007, C.A. No. 1896/2009 @
SLP(C)No. 3947/2007, C.A. No. 1897/2009 @ SLP(C)No. 5536/2007, C.A. No.
1898/2009 @ SLP(C)No. 5646/2007, C.A. No. 1899/2009 @ SLP(C)No. 7021/2007, C.A.
No. 1900/2009 @ SLP(C)No. 9641/2007, C.A. No. 1901 /2009 @ SLP(C)No. 9637/2007,
C.A. No. 1902/2009@ SLP(C)No. 1953/2009 C.A. No. 1903/2009 @ SLP(C)No.
2621/2009, C.A. No. 1906/2009 @ SLP (C)No. 8879/2008, C.A. No. 1907/2009 @
SLP(C)No.28553/2008, C.A. No. 1904/2009 @ SLP(C)No. 7307/2009 (CC.No. 17118),
C.A. No. 1905/2009 @ SLP(C)No. 7308/2009 (CC.No.17308), C.A. No. 1908/2009 @
SLP(C)No. 7310/2009 (CC No. 1584).
S.H. KAPADIA, J.
Delay condoned.
2. Leave granted.
3. In this batch of
civil appeals, the question which arises for determination is - whether TDS
provisions in Chapter XVII-B, which are in the nature of machinery provisions
to enable collection and recovery of taxes, are independent of the charging
provisions which determines the assessability of income chargeable under the
head "Salaries" in the hands of the recipient? Broadly stated, we
have cases in which the tax-deductor-assessee(s) has not deducted tax at source
on the Home Salary/special allowance(s) (education allowance or retention)
payments made by the Foreign Company/HO to its employees (expatriates to India)
outside India in foreign currency.
I. Facts in Civil
Appeal No. 5114/07: [CIT v. M/s Eli Lilly & Co. (I) Pvt. Ltd.]
4. Assessee was
engaged in manufacturing and selling pharmaceutical products during the
financial years 1992-93 to 1999-00. In the course of survey under Section 133A
of the Income-tax Act, 1961 ("1961 Act" for short), the AO noticed
that the foreign company had seconded four expatriates to the Joint Venture in
India; that, the tax-deductor-assessee was a Joint Venture Company; that, the
appointment of the four expatriates was routed through the Joint Venture Board
comprising of the Indian Partner, viz., M/s Ranbaxy Ltd. and that only part of
their aggregate remuneration was paid in India by the tax-deductor-assessee.
The post-survey operations revealed that no work stood performed for M/s Eli
Lilly Inc., Netherlands ("Foreign Company" for short). The AO further
found that the total remuneration paid was only on account of services rendered
in India and therefore in terms of Section 9(1)(ii) the income derived by the
expatriates was taxable in India and subject to Section 192(1) of the 1961 Act.
Consequently, the tax- deductor-assessee was asked to explain why it should not
be declared as "assessee-in-default" under Section 201(1) as it had
failed to deduct tax at source on the aggregate salary received by the four
expatriates.
5. In reply, the
tax-deductor-assessee submitted that the four expatriates were seconded by the
Foreign Company to the Joint Venture company in India; they were employed by
the joint venture; they continued to be on the rolls of the said Foreign
Company and they received Home Salary outside India in foreign currency from
the said Foreign Company. It was further submitted that the joint venture
company deducted tax at source under Section 192(1) in respect of the salary
paid to the expatriates in India and that no tax stood deducted in respect of
the Home Salary paid by the Foreign Company to the expatriates outside India,
dehors the contract of employment in India.
6. The AO held that
the respondent herein, viz., the tax-deductor- assessee, was an
"assessee-in-default" under Section 201 for failure to deduct tax at
source from out of Home Salary paid by the said Foreign Company outside India
and levied interest under Section 201(1A).
7. The Tribunal and
the High Court, however, held that the tax- deductor-assessee was not under
statutory obligation to deduct tax at source on the Home Salary paid by the
said Foreign Company under Section 192 as it was not paid by the Joint Venture
Company in India and consequently the said Joint Venture was not an
"assessee-in-default" under Section 201(1) of the 1961 Act. Hence,
the Department has come to this Court by way of these Civil Appeals.
8. To complete the
chronology of events, we may state that in some of the cases herein the
Department has levied penalty under Section 271C of the 1961 Act for failure to
deduct tax under Section 192(1) from out of Home Salary paid outside India by
the Head Office ("HO") to the expatriates deputed to the Branch
Office(s) in India which penalty was set aside on the ground that the
expatriates exercised dual employment and that there was no obligation on the
Branch Office to deduct tax under Section 192(1) on the Home Salary paid by the
HO outside India. It was further held that the said Home Salary paid by the HO
was not on account of or on behalf of the Branch Office since no deduction was
claimed for the salaries paid outside India in computing the income of the
Employer and accordingly it was held that no penalty was leviable under Section
271C of the 1961 Act. Against deletion of penalty under Section 271C, the
Department has come to this Court by way of these Civil Appeals.
II. Contentions:-
9. Shri Parag P.
Tripathi, learned Additional Solicitor General on behalf of the appellants, on
interpretation of Section 192 submitted that the said section comprises of 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 timeframe, (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.
10. According to the
learned senior counsel, the expression "any person" in Section 192
would include any person, responsible for making salary payment to an
assessee-employee, whether the employee is in India or outside India or whether
the payment is made in India or outside India. According to the learned counsel,
the only requirement is that the assessee-employee must be paid in respect of
services rendered in India. In this connection, learned counsel submitted that
Section 192(2) advisedly uses the expression "making the payment".
The said sub-section does not use the expression "making the
deduction". These very two expressions, according to the learned counsel,
find place also in Section 192(1), however, the said two expressions are used
in that sub-section in different context. The expression "payment" is
used in respect of payment of salary income to the assessee- employee and the
expression "deduction" is used in respect of deduction of tax.
According to the learned counsel, the very fact that Section 192(2) authorizes
the assessee-employee to choose one of the several persons "making the
payment" and not "making the deduction" is an indication that
the obligation under Section 192(1) attaches to "any" person, who is
responsible for making payment of any salary income and is not limited to a
person, who is under an obligation to deduct tax at source. This analyses was
advanced by the learned counsel to counter the arguments of one of the
assessees that Section 192(1) is in two parts, namely, one part relating to the
"obligation" to deduct the tax and the other relating to the
"quantum".
According to the
learned counsel, on a proper construction of Section 192(1), the expression
"deduct income tax on the amount payable" only qualifies the quantum
of tax to be deducted at source and not the identity of the person obliged to
make the payment. Therefore, according to the learned counsel, under Section
192 there is a clear obligation to deduct tax on "any" and every
person responsible for paying any salary income to an assessee-employee in
India so long as the said income is exigible to income tax in India. Section
192(2), according to the learned counsel, mitigates the rigours of Section 192
(1). In conclusion, learned counsel submitted that Section 192 imposes a joint
and several obligation on all the persons, who are responsible for paying any income
chargeable under the head "salaries" to an assessee-employee in
India. In the alternative, learned counsel submitted that even if it were to be
held that it is only the 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 expatriate employee outside India), particularly in view of the amendment
to Section 9(1)(ii), the obligation of the Indian employer has to be interpreted
coextensively and in respect to the entire salary income of the expatriate
employee so long as the salary income of such an employee arises or accrues in
India or is in respect of "services rendered in India".
11. On the penalty
issue, learned Additional Solicitor General submitted that the imposition of
penalty under Section 271C read with Section 273B is in the nature of a civil
liability. According to the learned senior counsel the burden of bringing the
case within the exception, namely, showing the "reasonable cause" is
squarely on the assessee. On facts, in the context of penalty, learned counsel
submitted that in each of these civil appeals the respondents-assessees have
pleaded bona fide misunderstanding of law, which explanation, according to the
learned senior counsel, does not satisfy the test of "reasonable
cause" and therefore merits rejection.
12. Shri Ajay Vohra,
learned counsel appearing on behalf of the respondent-M/s Eli Lilly & Co.
(India) Pvt. Ltd., submitted as follows.
13. M/s Eli Lilly
& Co. (India) Pvt. Ltd. was incorporated in India under the Companies Act, 1956. It was a joint
venture between M/s Eli Lilly, Netherlands B.V. and Ranbaxy Laboratories Ltd..
The foreign partner had seconded four expatriate(s) to the joint venture in
India. They were employee (s) by the joint venture. They, however, continued to
remain on the rolls of the foreign company. They received home salary outside
India from the foreign partner. The joint venture company deducted tax under
Section 192(1) in respect of the salary paid by it to the expatriate(s) in
India, however, no tax stood deducted in respect of the said home salary paid
by the foreign company. In the circumstances, learned counsel contended that
the assessee herein was under no obligation to deduct tax under Section 192(1)
of the 1961 Act from the "home salary", which admittedly was not paid
by the assessee herein. According to the learned counsel, Section 192 enjoins
upon the person responsible for paying salary to deduct tax out of the
estimated income chargeable under the head "salaries", at the time of
making payment thereof. The employer is thus expected to make an honest and
bona fide estimate at the beginning of the year of the income of the employee
chargeable under the head "salaries" and deduct tax at the average
rate at the time of payment of salary on month-to-month basis. Thus, Section
192 requires an estimate of income, inter alia, for the reason that the salary
is liable to change during the year on account of increment, pay revision,
payment of bonus, DA etc. and also on account of valuation of perquisites in
kind. Section 192 of the 1961 Act, according to the learned counsel, unlike
other sections in Chapter XVII-B, regulating deduction of tax at source,
requires such deduction to be made on estimated income chargeable under the
head "salaries" and at the time of payment of salary. The obligation
under Section 192(1) is on the person responsible for paying, to deduct tax at
source on the income of the employee chargeable under the head
"salaries".
Therefore, according
to the learned counsel, the obligation of the assessee herein (employer) is to
deduct tax at source qua the amounts actually paid by the employer or paid on
his behalf or on his account. This question as to whether payment has been made
on behalf of or on account of the employer has to be decided on facts of each
case. According to the learned counsel, the 1961 Act and the Rules framed
thereunder recognize deduction of tax by different units of the same employer
by treating each unit as a separate and independent deductor. In this
connection, reliance was placed on Rule 114A of the Rules and Circular No. 719
dated 22.8.1995. According to the learned counsel, where an employee is
simultaneously employed with more than one employer, the employee has an option
to file with one employer (the chosen employer), a declaration of the salary
earned by him in Form 12B. In this connection, learned counsel placed reliance
on Section 192(2). According to the learned counsel, the chosen employer, in
such circumstances, would be liable to deduct tax on the total income taxable
under the head "salaries". In the absence of exercise of option under
Section 192(2), the obligation of each employer, according to the learned
counsel, is confined to the amounts of salary actually paid and there is no
statutory obligation on one employer to take into account the salary paid by
the other employer and deduct tax from the gross salary. Therefore, according
to the learned counsel, there is nothing in Section 192(1) to suggest that the
aggregate salary received by an employee from various employers needs to be
taken into account by each employer while deducting tax at source. According to
the learned counsel, the TDS provisions are in the nature of machinery
provisions which enables easy collection and recovery of tax. The said
provisions are independent of the charging provisions which are applicable to
the recipient of income whereas the TDS provisions are applicable to the payer
of income. According to the learned counsel, therefore, the obligation to
deduct tax at source is on the deductor, which is independent of the assessment
of income in the hands of the expatriate employee(s); the deductor is obliged
to deduct tax at source only from the payment made by the deductor or payment
made on his behalf or on his account. Therefore, according to the learned
counsel, each employer is required to comply with and deduct tax from out of
the salaries paid by such employer. The obligation does not extend to deduction
of tax out of salaries paid by any other person, which is not on account of or
on behalf of such employer, notwithstanding that such salaries may have nexus
with the service of the employee with that employer and may be assessable to
tax in India in the hands of the recipient employee. According to the learned
counsel, on facts, the payment of salary by the foreign company in Netherlands
was not on behalf of or on account of the tax-deductor-assessee herein and,
consequently, it was not under statutory obligation to deduct tax from the
entire salary including the home salary, particularly when the expatriate(s)
did not exercise the option under Section 192(2) requiring the
tax-deductor-assessee herein to deduct tax from their aggregate salary income.
Lastly, learned counsel submitted that each of the expatriate employee(s) had
paid directly the taxes due on the home salary by way of advance
tax/self-assessment tax from time to time. They had filed also the Return of
Income. In such circumstances, according to the learned counsel, there was no
loss to Revenue occasioned on account of the alleged default by the assessee
herein in not deducting tax from the entire salary or on account of short
deduction of tax at source. According to the learned counsel, even if the
assessee herein is to be regarded as an assessee-in-default in terms of Section
201 of the Act, the tax alleged to be in default cannot be once again recovered
from the assessee herein since the same stood paid by the expatriate(s).
14. Shri S. Ganesh,
learned senior counsel appearing on behalf of M/s Ericsson Communications Pvt.
Ltd. (Civil Appeal No. 4082/07), submitted that the TDS provisions have no
extra-territorial operation. In this connection, learned counsel urged that
there is no provision in the 1961 Act which says that TDS provisions shall
apply to payment made abroad by a person who is located outside India. Learned
counsel next contended that breach of such provisions results in severe penal
and criminal sanctions and therefore penal and criminal liability imposition by
a statute on foreigners in respect of acts and omissions committed outside the
country should not be inferred unless there is a clear cut provision in the
said 1961 Act. In this connection, learned counsel placed reliance on the
provisions of Sections 200, 201, 203, 203A, 206, 271C (penalty) and 276B
(prosecution). The learned counsel next contended that the issue as to whether
the TDS provisions are applicable to payments made abroad has nothing to do with
assessability of such amounts in the hands of the recipient. In this
connection, learned counsel stated that there are several payments which do not
attract TDS provisions, but which are assessable to tax in the hands of the
recipient, e.g., salary paid by a foreign employer to his employee in India or
professional fees paid by a client from abroad to his Lawyer/Chartered
Accountant/Technical Consultant in India. These payments, according to the learned
counsel, are undoubtedly taxable in India in the hands of the recipient.
Nevertheless, no tax
would be deductible at source thereon as they are made outside India and are
not subject to the TDS provisions.
15. On the point of
interpretation of Section 192(1), learned counsel submitted that the said section
can be divided into two distinct parts, the first part consisting of the words
"any person responsible for paying any income chargeable under the head
salaries shall, at the time of payment deduct income tax on the amount
payable" and the second part consisting of the following words:- "at
the average rate of income tax, computed on the basis of the rates in force in
the financial year in which the payment is made, on the estimated income of the
assessee under this head for the financial year."
The submission made
by the learned counsel was that the first part of Section 192(1) creates the
legal liability to deduct tax at source whereas the second part provides for
the computation of the amount of tax to be deducted.
According to the
learned counsel, the first part of Section 192(1) makes it clear that the tax
has to be deducted on the amount payable by the person concerned. According to
the learned counsel, on a plain and correct reading of Section 192(1), tax is
deductible from the amount paid or payable by the person concerned and he is
not at all required to deduct tax in respect of an amount which is paid by any
other person. He is also not required to take into account the amount received
by the employee from other sources or to deduct tax taking into account such
other amounts. Learned counsel further submitted that in the second part of
Section 192(1) the words used are "estimated income of the assessee".
According to the learned counsel, the second part of Section 192(1), therefore,
refers only to the estimated income of the recipient employee for the whole
financial year on the basis of the payments made to him by the person
responsible for deducting the tax at source. According to the learned counsel,
the only reason why such words occur in Section 192(1) and not in any other
sections dealing with deduction of tax on other items of income is that there
is no fixed rate of tax to be applied for determining tax at source on
salaries. In this connection, learned counsel pointed out that salary is paid
on a monthly basis and the tax has to be deducted therefrom at the applied rate
of income tax which is arrived at by considering the employee's estimated
salary income received from the person concerned for the entire financial year.
That is why, according to the learned counsel, even in Section 192(2) a
provision is made to the effect that it is only in special and extraordinary
circumstances mentioned therein that a particular employer is required to
consider the payments made to the employee by another employer. As a corollary,
according to the learned counsel, if the extraordinary circumstances mentioned
in Section 192(2) do not exist, as in ordinary cases covered by Section 192(1),
then the employer, who has to deduct tax at source, is required to consider
only the payments made by him and not payments received by the employee from
any other sources.
According to the
learned counsel, the present cases are not governed by Section 192(2).
Therefore, in M/s Ericsson Communications Pvt. Ltd. case, according to the
learned counsel, the employer was not liable in law to deduct tax at source in
respect of the "child education payments" made by a Swedish company
to its expatriate employee(s) in Sweden. In the alternative, learned counsel urged
that the assessee was under the bona fide impression that it was not required
to deduct such tax at source in respect of the said expatriate employee(s),
which bona fide impression constituted "reasonable cause" and
therefore, in any event, no penalty could be imposed on the assessee under
Section 271C read with Section 273B of the 1961 Act.
16. Shri M.S. Syali,
learned senior counsel appearing on behalf of M/s Mitsui & Company Ltd.
(Civil Appeal No. 5152/05) submitted that the sole issue in his case was
whether the Tribunal/High Court were correct in law in cancelling the penalty
imposed under Section 271C of the 1961 Act. It was submitted that the
retention/continuation payment(s) to expatriates in Japan by the HO was not
taxable in India and/or the provisions of Chapter XVII-B requiring deduction of
tax at source were not applicable to such payment. It was further submitted
that the respondent is a foreign company having its HO in Tokyo. It had, in the
relevant financial years in India, a Project Office and a Liaison Office. The
Japanese expatriates were deputed to the said Establishments as employees. As
per the terms of deputation, the said expatriates were to be paid
"salaries" for the services rendered in India by the respective
Establishment, in addition, a retention/continuation was paid in Japan by the
HO to ensure continuity in service. Tax at source was deducted by the
respective Establishment, however, on the retention/continuation paid in Japan
by HO, it was not deducted under Chapter XVII-B of the 1961 Act.
On facts, learned
counsel pointed out that the tax-deductor-assessee presented its case before
the Department. Its stand was not accepted by the Department. However, after
consultation with the CBDT, the tax-deductor- assessee agreed and deposited the
tax and interest on the understanding that there will not be any penalty
proceedings. According to the learned counsel, contrary to its promise,
Department commenced penalty proceedings under Section 271C against the Project
Office and the Liaison Office in India for the alleged default of the HO in
Japan. Therefore, according to the learned counsel, both, in law and on facts,
the Department had erred in initiating penalty proceedings under Section 271C.
17. On the legal
issue, learned counsel contended that the Department was not right in its
submission that after the amendment of Section 9(1)(ii) made to the Act after
the decision in the case of CIT v. S.G. PGNATALE reported in 124 ITR
391(Gujarat), retention/continuation dues can be construed as income under the
head "salaries". According to the learned counsel, the Gujarat High
Court (supra) had held that amounts paid outside India by the French company
for rendering services in India though referred to as "retention remuneration"
was not liable to tax in India because the word "earned" has a narrow
as well as wider meaning. In view of the difference in the language in clauses
(ii) and (iii) of Section 9(1), salaries earned in India shall be governed by
the narrower meaning. Accordingly, the Gujarat High Court in the above judgment
equated the words "salaries earned in India" to
"arising/accruing in India". According to the Gujarat High Court,
therefore, although the amount payable was for rendering services in India but
having been paid by a person responsible outside India, the said earning of
salaries cannot be treated as having accrued or arisen in India. In order to
nullify the effect of the judgment of the Gujarat High Court, according to the
learned counsel, an Amendment was brought in Section 9(1)(ii) adding an
Explanation thereto by which the above decision of the Gujarat High Court stood
overruled. By the said Amendment, it was stipulated that income which falls
under the head "salaries" if earned in India will include such income
payable for services rendered in India. According to the learned counsel, the
insertion with retrospective effect from 1.4.1979 by the Finance Act, 1983, however,
was not all inclusive. According to the learned counsel, despite the said
Amendment, amounts paid to foreign technicians for "off period" could
not be taxed as "salary". Being aware that the Explanation, as it
stood at that time, did not include within its purview the salary paid for the
"off period", the Legislature once again amended the Explanation to
Section 9(1)(ii), explaining its scope to include therein the salary paid for
the rest period or leave period, but, only such, which is preceded or succeeded
by services rendered in India and which forms part of the service contract of
employment.
However, such
Explanation of the scope of Section 9(1)(ii) only took effect from 1.4.2000 and
it applied only in relation to the Assessment Year 2000- 2001 and subsequent
years thereto. The Explanation was made expressly prospective. Therefore,
according to the learned counsel, any and everything paid to an employee does
not fall within the scope of Section 9(1)(ii).
According to the
learned counsel, it is only when rendition of service takes place, that the
amount is liable to be taxed in India and not otherwise. The mere fact that the
amount flows from the employer does not render it taxable even under the
amended Section 9(1)(ii) read with the Explanation.
18. According to the
learned counsel, Section 192 does not have extra- territorial operation. On this
point, we find that the arguments advanced by Shri M.S. Syali, learned senior
counsel appearing for M/s Mitsui & Co. Ltd.
are similar to the
submissions made by Shri S. Ganesh, learned senior counsel appearing for M/s
Ericsson Communications Pvt. Ltd., which submissions are stated hereinabove.
Hence, we need not repeat such submission and burden this judgment. Lastly,
Shri Syali, learned senior counsel, submitted that Section 192 mandates
deduction of tax at source by "any" person responsible for paying
"any" income chargeable under the head "salaries". The
deduction from the said income, according to the learned counsel, is stipulated
to be "on the amount payable". According to the learned counsel,
therefore, there is no basis for reading Section 192 as imposing a liability on
"any" person responsible for paying such income to deduct tax from
the entire income chargeable under the said head. According to the learned
counsel, the words "on the amount payable" and "any income"
clearly mandate that the person responsible for paying is concerned only with
the amount that is payable by him. According to the learned counsel, the person
responsible is not obliged under Section 192 to deduct tax on the entire
"amount payable". According to the learned counsel, Section 192 inter
alia stipulates that within the amount payable, he has to arrive at the
"estimated income" of the assessee under the head
"salaries" for the financial year. The words "estimated
income" is the net figure calculated under the relevant provisions on
estimate basis from the amount payable. The entire salary is not paid in one go
and, therefore, out of the estimated amount payable for that financial year,
income for the month under the said head is to be ascertained and accordingly
one has to determine the appropriate average rate. According to the learned
counsel, each Establishment, i.e., the Project Office and the Liaison Office
(in this case) has to be treated as separate and independent entities for the
purpose of applicability of Section 192 and for compliance with other
provisions in Chapter XVII-B and consequently the assessee has not erred
therefore in treating the HO a distinct and separate person responsible for
paying.
Therefore, according
to the learned counsel, no default could be attributed merely because the
assessee agreed with the Department's understanding of the said provisions. In
this connection, learned counsel placed reliance on Sections 159A, 203 Rule
114A and Form 49B. He also relied upon Rule 36A and Rule 37 of the Income-tax
Rules, 1962. Learned counsel next contended that under Section 204(i), the
person responsible for paying would cover either the employer himself or if the
employer is a company the company itself including its principal officer.
According to the learned counsel, the definition contemplates two situations -
where the branch is the person responsible, it acts as the employer, and where
centralized compliance is made, the company is treated as the employer.
According to the learned counsel, in cases where the Liaison Office and the
Project Office are separate employers distinct from the company, as the company
itself is not an assessee paying taxes on its global income, then the employer
is not the company. In such cases, the persons who need to comply with the
provisions is either the Project Office or the Liaison Office. In this
connection, learned counsel placed reliance also on Section 192(2) which
stipulates that in case of successive or simultaneous employers, the
sub-section enables the employee to furnish particulars in respect of salaries
due or received by him from one employer to the other. These particulars are
required to be taken into account by the chosen employer to examine its impact
upon the average rate of tax and the quantum of tax that is to be deducted by
the chosen employer.
According to the
learned counsel, the sub-section does not cast vicarious liability of one
employer upon the other. Each employer, be it successive or simultaneous, is
independently liable to comply with the TDS provisions in respect of the amount
it pays. Therefore, according to the learned counsel, the said sub-section
belies the concept of aggregation or consolidation of the entire amount under
the head "salaries" being exigible to deduction of tax at source
under Section 192 in the hands of one person responsible for paying a part
thereof. Lastly, learned counsel submitted that the issue involved in these
civil appeals is nascent. It involves a moot point. It has not been considered
by the Apex Court earlier. Therefore, in any event, this case is not a fit case
for imposing penal consequences.
19. Shri C.S.
Agarwal, learned senior counsel, Shri Kannan Kapoor, and Shri Salil Kapoor,
learned counsel appearing for various other assessees 22
have adopted the arguments mentioned hereinabove.
III. Relevant
Provisions of the Income-tax Act, 1961:
Section 2 -
Definitions.
"2.(37A)
"Rate or rates in force" or "rates in force", in relation
to an assessment year or financial year, mean- (i) for the purposes of
calculating income-tax under the first proviso to sub-section (5) of section
132, or computing the income-tax chargeable under sub-section (4) of section
172 or sub-section (2) of section 174 or section 175 or sub-section(2) of
section 176 or deducting income-tax under section 192 from income chargeable
under the head "Salaries" or computation of the "advance
tax" payable under Chapter XVII-C in a case not falling under section 115A
or section 115B or section 115BB or section 115BBB or section 115E or section
164 or section 164A or section 167B, the rate or rates of income-tax specified
in this behalf in the Finance Act of the relevant year and for the purposes of
computation or of the "advance tax" payable under Chapter XVII-C, in
a case falling under section 115A or section 115B or section 115BB or section
115BBB or section 115E or section 164 or section 164A or section 167B, the rate
or rates specified in section 115A or section 115B or section 115BB or section
115BBB or section 115E or section 164 or section 164A or section 167B, as the
case may be, or the rate or rates of income-tax specified in this behalf in the
Finance Act of the relevant year, whichever is applicable.
(ii) for the purposes
of deduction of tax under sections 193, 194, 194A, 194B, 194BB and 194D the
rate or rates of income-tax specified in this behalf in the Finance Act of the
relevant year;
(iii) for the
purposes of deduction of tax under section 195, the rate or rates of income-tax
specified in this behalf in the Finance Act of the relevant year or the rate or
rates of income- 23 tax specified in an agreement entered into by the Central
Government under section 90, or an agreement notified by the Central Government
under section 90A, whichever is applicable by virtue of the provisions of
section 90, or section 90A, as the case may be."
Income deemed to
accrue or arise in India.
"Section 9.(1)
The following incomes shall be deemed to accrue or arise in India- (i) ...
(ii) Income which
falls under the head "Salaries", if it is earned in India.
Explanation.-(Inserted
by the Finance Act, 1983, with retrospective effect from 1.4.1979) - For the
removal of doubts, it is hereby declared that income of the nature referred to
in this clause payable for service rendered in India shall be regarded as
income earned in India.
Explanation.-
.-(Substituted by the Finance Act, 1999, w.e.f.
1.4.2000)- For the
removal of doubts, it is hereby declared that the income of the nature referred
to in this clause payable for- (a) service rendered in India; and (b) the rest
period or leave period which is preceded and succeeded by services rendered in
India and forms part of the service contract of employment, shall be regarded
as income earned in India."
Amounts not
Deductible.- Section 40 24 "Notwithstanding anything to the contrary in
sections 30 to 38, the following amounts shall not be deducted in computing the
income chargeable under the head "Profits and gains of business or
profession", - (a) In the case of any assessee - (i) any interest (not
being interest on a loan issued for public subscription before the 1st day of
April, 1938), royalty, fees for technical services or other sum chargeable
under this Act, which is payable,- (A) outside India; or (B) in India to a
non-resident, not being a company or to a foreign company, on which tax is
deductible at source under Chapter XVII-B and such tax has not been deducted
or, after deduction, has not been paid during the previous year, or in the
subsequent year before the expiry of the time prescribed under sub-section(1)
of section 200:"
...
"(iii) any
payment which is chargeable under the head "Salaries", if it is
payable- (A) outside India; or (B) to a non-resident, and if the tax has not
been paid thereon nor deducted therefrom under Chapter XVII-B;"
Deduction at source
and advance payment.- "Section 190:
(1) Notwithstanding
that the regular assessment in respect of any income is to be made in a later
assessment year, the tax on such income shall be payable by deduction or
collection at source or by advance payment or by payment under sub-section (1A)
of section 192, as the case may be, in accordance with the 25 provisions of
this Chapter.
(2) Nothing in this
section shall prejudice the charge of tax on such income under the provisions
of sub-section (1) of section 4."
Direct Payment.-
"Section 191 :
In the case of income
in respect of which provision is not made under this Chapter for deducting
income-tax at the time of payment, and in any case where income-tax has not
been deducted in accordance with the provisions of this Chapter, income-tax
shall be payable by the assessee direct.
Explanation.- For the
removal of doubts, it is hereby declared that if any person referred to in
section 200 and in the cases referred to in section 194, the principal officer
and the company of which he is the principal officer does not deduct the whole
or any part of the tax and such tax has not been paid by the assessee direct,
then, such person, the principal officer and the company shall, without
prejudice to any other consequences which he or it may incur, be deemed to be
an assessee in default as referred to in sub-section (1) of section 201 in
respect of such tax."
Salary.-
"Section 192.- (1) Any person responsible for paying any income chargeable
under the head "Salaries" shall, at the time of payment, deduct
income-tax on the amount payable at the average rate of income-tax computed on
the basis of the rates in force for the financial year in which the payment is
made, on the estimated income of the assessee under this head for that
financial year."
Consequences of
Failure to Deduct or Pay:- "Section 201:
26 (1) If any such
person referred to in section 200 and in the cases referred to in section 194,
the principal officer and the company of which he is the principal officer does
not deduct the whole or any part of the tax or after deducting fails to pay the
tax as required by or under this Act, he or it shall, without prejudice to any
other consequences which he or it may incur, be deemed to be an assessee in
default in respect of the tax :
Provided that no
penalty shall be charged under section 221 from such person, principal officer
or company unless the Assessing Officer is satisfied that such person or principal
officer or company, as the case may be, has without good and sufficient reasons
failed to deduct and pay the tax.
(1A) Without
prejudice to the provisions of sub-section (1), if any such person, principal
officer or company as is referred to in that sub-section does not deduct the
whole or any part of the tax or after deducting fails to pay the tax as
required by or under this Act, he or it shall be liable to pay simple interest
at one per cent for every month or part of a month on the amount of such tax
from the date on which such tax was deductible to the date on which such tax is
actually paid and such interest shall be paid before furnishing the quarterly
statement for each quarter in accordance with the provisions of sub-section (3)
of section 200."
Penalty for Failure
to Deduct Tax at Source:
"Section 271C:
(1) If any person fails to - (a) Deduct the whole or any part of the tax as
required by or under the provisions of Chapter XVII-B; or (b) Pay the whole or
any part of the tax as required by or under, - (i) Sub-section (2) of section
115-O; or (ii) Second proviso to section 194B, then, such person shall be
liable to pay, by way of penalty, a sum equal to the amount of tax which such
person failed to 27 deduct or pay as aforesaid.
(2) Any penalty
imposable under sub-section (1) shall be imposed by the Joint
Commissioner."
Penalty not to be
imposed in Certain Cases:
Section 273B:
"Notwithstanding
anything contained in the provisions of clause (b) of sub-section (1) of
section 271, section 271A, section 271AA, section 271B, section 271BA, section
271BB, section 271C, section 271CA, section 271D, section 271E, section 271F,
section 271FA, section 271FB, section 271G, clause (c) or clause (d) of
sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section
272AA, or sub-section (1) of section 272BB or sub-section (1A) of section 272BB
or sub- section (1) of section 272BBB or clause (b) of sub-section (1) or
clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be
imposable on the person or the assessee, as the case may be, for any failure
referred to in the said provisions if he proves that there was reasonable cause
for the said failure."
IV. Issue:
20. Whether TDS
provisions which are in the nature of machinery provisions enabling collection
and recovery of tax are independent of the charging provision which determines
the assessability in the hands of the employee-assessee (recipient)? In other
words, whether TDS provisions under the Income-tax Act, 1961 are applicable to
payments made abroad by 28 the Foreign Company, which payments are for Income
chargeable under the Head "Salaries" and which are made to
expatriates who had rendered services in India? V. Our Decision:
(i) Whether TDS
provisions which are in the nature of machinery provisions are independent of
the Charging Provisions?
21. At the outset, we
wish to clarify that our judgment is confined strictly to the question of
deductibility of tax from the "income chargeable under the Head `Salaries'"
under Section 192(1). This introduction is important for the reason that unlike
other sections in Chapter XVII-B regulating deduction of tax at source out of
Other Payments, Section 192 requires such deduction on "estimated
income" chargeable under the head "Salary" and at the time of
payment of salary. Chapter XVII is divided into various parts as `A' to `F'.
Part `A' deals with deduction at source and advance payment. Section 190, inter
alia, provides that notwithstanding the regular assessment in respect of any
income, the tax on such income shall be payable by deduction or collection at
source or by advance payment in accordance with the provisions of the Chapter.
Hence, before a regular assessment is made, tax on income becomes payable by
deduction or collection at source or by advance payment in accordance with the
provisions 29
of the Chapter. Section 191 provides for direct payment of income-tax by the
assessee in cases where provision for deduction of tax at source is not made
under the Chapter. Part `B' of Chapter XVII contains a group of sections which
provides for "deduction of tax" at source. Section 192 provides for
deduction of tax on the income chargeable under the head "Salaries"
by any person responsible for paying such salaries. Section 193 provides for
deduction of income-tax by the person responsible for paying any income by way
of "interest on securities". Section 194 provides for deduction of
tax at source by the company paying "dividends". Section 194A, Section
194B, Section 194BB inter alia provides for deduction of tax at source from the
income of interest other than interest on securities, winnings from lotteries,
winnings from horse race respectively. Even with regard to payment to
contractors and sub-contractors, specific provision is made for deducting tax
at source on the basis of payment of such sum as the income-tax on income
comprised therein. Under the 1961 Act, total income for the previous year is
chargeable to tax under Section 4. Section 4(2) inter alia provides that in
respect of income chargeable under Section 4(1), income-tax shall be deducted
at source where it is so deductible under any provision of the 1961 Act.
Section 192(1) falls in the machinery provisions. It deals with collection and
recovery of tax. That provision is referred to in Section 4(2). Therefore, if a
sum that is to be paid to the non-resident is chargeable to tax, tax is
required to be deducted. The sum which is to be paid may be income out of
different heads of income mentioned in Section 14, that is to say, income from
salaries, income from house property, profits and gains of business, capital
gains and income from other sources. The scheme of the TDS provisions applies
not only to the amount paid, which bears the character of "income"
such as salaries, dividends, interest on securities etc. but the said
provisions 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
in Chapter XVII B is to see that the sum which is chargeable under Section 4
for levy and collection of income-tax, the payer should deduct tax thereon at
the rates in force, if the amount is to be paid to a non-resident. The said TDS
provisions are meant for tentative deduction of income-tax subject to regular
assessment. (see Transmission Corporation of A.P. Ltd. and Anr. v. CIT reported
in [1999] 239 ITR 587 at p. 594).
22. As stated above,
the question which arises for determination is:
whether TDS
provisions in Chapter XVII-B, which are in the nature of machinery provisions
enabling collection and recovery of tax are at all applicable to payments made
abroad by the Foreign Company/HO who had seconded the expatriate(s) for
rendering services in India to the tax-deductor- assessee (employer)?
23. To answer the
above question one needs to examine the issue - whether TDS provisions have
extra-territorial operations as also the inter- linking of various provisions
in the 1961 Act dealing with chargeability, liability, collection and recovery
of taxes.
24. On the question
of extra-territorial operation of the 1961 Act the general concept as to the
scope of income-tax is that, given a sufficient territorial connection or nexus
between the person sought to be charged and the country seeking to tax him, income-tax
may extend to that person in respect of his foreign income. The connection can
be based on the residence of the person or business connection within the
territory of the taxing State;
and the situation
within the State of the money or property from which the taxable income is
derived (see The Law and Practice of Income Tax by Kanga and Palkhivala,
seventh edition, at p. 10).
25. In the case of
A.H. Wadia v. CIT reported in (1949) 17 ITR 63 the Federal Court held that so
long as the statute (Income-tax Act, 1922) selected some fact or circumstance
which provided some connection or nexus between the person who is subject to
the tax and the country imposing the tax, its validity would not be open to
challenge on the ground that it is extra- territorial in operation. In that
case, the question which arose for determination before the Federal Court was
whether Section 42(1) of the 1922 Act, which brought within the scope of the
charging section "interest"
earned out of money
lent outside British India, but brought into British India as ultra vires the
Indian Legislature on the ground that it had extra-territorial operation. It
may be stated that Section 9 of the 1961 Act gathers in one place various
provisions (which stood scattered in the 1922 Act) under which income actually
accruing to an assessee abroad is deemed to accrue in India.
Section 42(1) of the
1922 Act is similar to Section 9(1)(i) of the 1961 Act. It was held by the
Federal Court that Section 42(1) brings within the ambit of the charging
section (Section 4 of the 1922 Act) income accruing or arising, directly or
indirectly, under the four categories of income, viz., from business connection
or property or asset/ source of income in India or through transfer of capital
asset in India or through moneys lent. It was held that since the money lent
was brought by the assessee into British India, the transaction fell under one
of the categories of income in Section 42(1), consequently the income therefrom
was deemed to accrue or arise in British India. It was held that once an income
came within one of the categories of income in Section 42(1), the income
arising out of the transaction came under Section 42(1) as there existed a
territorial connection between the person receiving income under the particular
head and India. It may be mentioned that Section 42(1) of the 1922 Act is
similar to Section 9(1) of the 1961 Act which deems certain categories of
income to accrue in India.
26. Applying the
above test, we are of the view that if the payments of Home Salary abroad by
the Foreign Company to the expatriate has any connection or nexus with his
rendition of service in India then such payment would constitute income which
is deemed to accrue or arise to the recipient in India as salary earned in
India in terms of Section 9(1)(ii) (which is one of the heads of income).
Section 9(1)(ii) lays down that income which falls under the head
"Salaries", if it is earned in India, shall be deemed to accrue or
arise in India. In fact, Section 9 explains the expression "is deemed to
accrue or arise to him in India" used in Section 5(2)(b). Section 9 is not
only a machinery section, it has the effect of rendering a person liable to tax
on income which do not accrue or arise or are not received in India but which
are deemed to be taxable by virtue of Section 9 which applies to residents and
non-residents. Section 9 is, therefore, a typical example of a combination of a
machinery provision which also provides for chargeability.
27. Lastly, on the
question of extra-territorial operation of the Income- tax Act, 1961, it may be
noted that the 1961 Act has extra-territorial operation in respect of the
subject-matters and the subjects which is permissible under Article 245 of the
Constitution and the provisions are enforceable within the Area where the 1961
Act extends through the machinery provided under it.
28. On the question
as to whether there is any inter-linking of the charging provisions and the
machinery provisions under the 1961 Act, we may, at the very outset, point out
that in the case of CIT v. B.C. Srinivasa Setty reported in [1981] 128 ITR 294
this Court has held that the charging section and the computation provisions
together constitute an integrated Code. When there is a case to which computation
provisions cannot apply at all, it is evident that such a case was not intended
to fall within the charging section. We may add that, the 1961 Act is an
integrated code and, as stated hereinabove, Section 9(1) integrates the
charging section, the computation provisions as well as the machinery
provisions. (see Section 9(1)(i) read with Sections 160, 161, 162 and 163)
29. In the present
case, it has been vehemently urged that TDS provisions being machinery
provisions are independent of the charging provisions whereas as held by this
Court in the case of B.C. Srinivasa Setty (supra), the 1961 Act is an
integrated Code. To answer the contention herein we need to examine briefly the
scheme of the 1961 Act. Section 4 is the charging section. Under section 4(1),
total income for the previous year is chargeable to tax. Section 4(2) inter
alia provides that in respect of income chargeable under sub-section(1),
income-tax shall be deducted at source whether it is so deductible under any
provision of the 1961 Act which inter alia brings in the TDS provisions
contained in Chapter XVII-B. In fact, if a particular income falls outside
Section 4(1) then TDS provisions cannot come in. Under Section 5, all residents
and non-residents are chargeable in respect of income which accrues or is
deemed to accrue in India or is received in India. Non-residents who are not
assessable in respect of income accruing and received abroad are rendered
chargeable under Section 5(2)(b) in respect of income deemed by Section 9 to
accrue in India. Section 9 deems certain categories/heads of income to accrue
in India has no application in cases where income actually accrues in India.
Likewise, Section 9 does not apply in cases where income is received in India.
Therefore, if the income is not received in India, a non-resident would not be
chargeable to tax upon it unless it accrues or is deemed to accrue in India.
Thus, a general charge of income- tax is imposed by Section 4 and 5, and that
general charge is given a particular application in respect of non-residents by
Section 9 which enlarges the ambit of taxation by deeming income to arise in
India in certain circumstances. Under Section 9(1), income is deemed to accrue
in India if it accrues directly or indirectly under five circumstances
mentioned therein. To give an example of as to how the 1961 Act is an
integrated Code we may state that Section 9(1) explains the meaning of the
words "deemed to accrue or arise in India" in Section 5(2)(b).
Section 9(1)(i) performs two functions:
I. It deems the above
five categories of income to accrue in India. The deeming provisions of this
clause (a) apply to residents and non-residents alike;
(b) have no
application where income actually accrues in India or is received in India.
Both these points
have been noted above in dealing with this section generally.
II. It specifies the
categories of income in respect of which a vicarious liability is imposed by
Sections 160 and 161 on an agent to be assessed in respect of a non-resident's
income. In performing this function, the clause (a) applies to the income of
non-residents alone;
(b) specifies the
categories of income in respect of which the agent is vicariously liable even
if the income actually accrues in India or is received in India.
Examples showing
inter-linking of various provisions of the 1961 Act:
(a) It may be noted
that Sections 160(1)(i), 161, 162 and 163 are machinery sections. They do not
affect the incidence of taxation under Sections 4 and 5 which are the charging
sections. Sections 160 and 161 provide a machinery for collection of a charge
which is imposed in general terms elsewhere and yet Sections 160 and 161 are
the sections which like Section 201(1) imposes a vicarious liability on an
agent to be assessed in respect of the income of the principal. The liability
is imposed under Sections 160 and 161 in respect of the income of non-resident
principal and it is only in respect of the income falling within Section 9(1)
and not any other income.
Therefore, one has to
read Section 9(1) with Section 160 and Section 161 which are machinery sections
(See The Law and Practice of Income Tax by Kanga & Palkhivala, eighth
edition., at pp. 1268 and 1269).
(b) Similarly,
Section 40(a)(iii), quoted above, which finds place in Chapter IV (computation
of business income) inter alia states that any payment which is chargeable
under the head "Salaries", if it is payable outside India or to a
non-resident and if the tax thereon is not deducted from such payment under
Chapter XVII-B then notwithstanding the entitlement of the assessee to claim
deduction, the same will be disallowed for such non- deduction of tax at
source.
30. The above
examples show that the 1961 Act is an integrated code in which one cannot
segregate the computation machinery from the collection and recovery machinery.
(ii) On the Scope of
Section 192(1):
31. On behalf of the
tax-deductor-assessee the basic contention before us was that Section 192(1)
was not applicable as the Home Salary was paid by the foreign company outside
India dehors the contract between the respondent herein and the expatriate(s).
That, the contract under which the home salary was paid in foreign currency
stood executed outside India. That, the payment of home salary by the foreign
company abroad was not on behalf of or on account of the tax-deductor-assessee
(who has not claimed deduction for such salary in computation of its business
income in India under the 1961 Act), therefore, it was urged that there was no
obligation on the tax-deductor- assessee to deduct tax from the Home
Salary/special allowance(s) paid in foreign currency abroad.
32. To resolve the
controversy, we need to analyse Section 192(1).
After going through
the relevant provisions of Section 192 and Section 9(1) (ii) with the Explanation
thereto we are of the view that Section 192 inter alia provides that any person
responsible for payment of any income chargeable under the head
"Salaries" shall at the time of payment deduct income-tax on the
basis of the rates in force for the financial year. It is true that the word
"aggregate" does not precede the word "income" in Section
192(1). However, in Section 192(1), the words used are "any income chargeable
under the head "salaries" shall at the time of payment, deduct
income-tax on the amount payable. There is a marked similarity between Section
192(1) and Section 40(a)(iii). The word(s) used in Section 192 is not merely
"salaries". The words used in Section 192(1) are "any income
chargeable under the head `Salaries'". This aspect is very important.
Under the 1961 Act, as stated hereinabove, there are different categories of
income enumerated in Section 9(1). One such income falls under the head
"Salaries"
if earned in India
(see Section 9(1)(ii)). Once an income falls under Section 9 (1), it comes in
the category of income deemed to accrue or arise in India in terms of Section
5(2)(b). This is one more example of the 1961 Act being an integrated code. At
this stage two aspects need to be highlighted. Firstly, in Section 192(1), tax at
source has to be deducted on the amount payable. This is where the
tax-deductor-assessee has to estimate the income of the assessee-employee under
the head "Salaries". This word "payable" also finds place
in Section 40(a)(iii). Secondly, one has to note the effect of the Explanation
to Section 9(1)(ii). Prior to the insertion of the Explanation, the Gujarat
High Court had held in the case of PGNATALE (supra) that the words "earned
in India" in Section 9(1)(ii) must be interpreted as "arising or
accruing in India" and not as "from services rendered in India".
Therefore, according to the Gujarat High Court, if the liability to pay arose
outside India and the amount became payable outside India, Section 9(1)(ii) was
not invokable. To offset the effect of the judgment of the Gujarat High Court,
an Explanation was inserted by which the expression "earned in India"
stood equated to "services rendered in India". Thus, according to
Kanga and Palkhivala on the The Law and Practice of Income Tax, Section 9(1)(ii)
inter alia provides for an artificial place of accrual for income taxable under
the head "Salaries" (see seventh edition at p. 207). Section 9(1)(ii)
thus enacts that income chargeable under the head "Salaries" under
Section 15 shall be deemed to accrue or arise in India if it is earned in
India, i.e., if the services under the agreement of employment are or were
rendered in India, the place of receipt or actual accrual of the salary being
immaterial. Thus, Section 192 (1) has to be read with Section 9(1)(ii). This is
one more illustration to show that the 1961 Act is an integrated code. In fact,
if Section 192(1) is to be segregated from Section 9(1)(ii) or from Section
40(a)(iii) then the very purpose of shifting the "accrual test" to
the "earning test" by reason of insertion of Explanation, would stand
defeated. In this connection one more aspect may be noted. Section 192(1) is
the only section in Chapter XVII-B, unlike other sections in that chapter,
which requires deduction of tax at source on estimation of income chargeable
under the head "Salary". The act of "estimation" is similar
to computation of income. As stated above, the 1961 Act is an integrated Code
in which chargeability and computation goes hand in hand. Thus, Section 192(1),
which is a stand-alone section in Chapter XVII-B, has to be read with Section
9(1)(ii).
33. From the above
analyses two conclusions flow. Firstly, it cannot be stated as a broad
proposition that the TDS provisions which are in the nature of machinery
provisions to enable collection and recovery of tax are independent of the
charging provisions which determines the assessability in the hands of the
employee-assessee. Secondly, whether the Home Salary payment made by the
Foreign Company in foreign currency abroad can be held to be "deemed to
accrue or arise in India" would depend upon the in- depth examination of
the facts in each case. If the home salary/special allowance payment made by
the foreign company abroad is for rendition of services in India and if as in
the present case of M/s Eli Lilly & Company (India) Pvt. Ltd. no work was
found to have been performed for M/s Eli Lilly Inc Netherlands then such
payment would certainly come under Section 192 (1) read with Section 9(1)(ii).
As stated above, the post-survey operations revealed that no work stood
performed for the foreign company by the four expatriates to the joint venture
company in India and that the total remuneration paid was only for services
rendered in India. In such a case the tax-deductor-assessee was statutorily
obliged to deduct tax under Section 192 (1) of the 1961 Act.
(iii) On the Scope of
Section 201(1) and Section 201(1A):
34. A perusal of
Section 201(1) and Section 201(1A) shows that both these provisions are without
prejudice to each other. It means that the provisions of both the sub-sections
are to be considered independently without affecting the rights mentioned in either
of the sub-sections. Further, interest under Section 201(1A) is compensatory
measure for withholding the tax which ought to have gone to the exchequer. The
levy of interest is mandatory and the absence of liability for tax will not
dilute the default. The liability of deducting tax at source is in the nature
of a vicarious liability, which pre-supposes existence of primary liability.
The said liability is a vicarious liability and the principal liability is of
the person who is taxable. A bare reading of Section 201(1) shows that interest
under Section 201(1A) read with Section 201(1) can only be levied when a person
is declared as an assessee-in-default. For computation of interest under
Section 201(1A), there are three elements. One is the quantum on which interest
has to be levied.
Second is the rate at
which interest has to be charged. Third is the period for which interest has to
be charged. The rate of interest is provided in the 1961 Act. The quantum on
which interest has to be paid is indicated by Section 201 (1A) itself.
Sub-section (1A) specifies "on the amount of such tax" which is
mentioned in sub-section (1) wherein, it is the amount of tax in respect of
which the assessee has been declared in default. The object underlying Section
201(1) is to recover the tax. In the case of short deduction, the object is to
recover the shortfall. As far as the period of default is concerned, the period
starts from the date of deductibility till the date of actual payment of tax.
Therefore, the levy of interest has to be restricted for the above stated
period only. It may be clarified that the date of payment by the concerned
employee can be treated as the date of actual payment.
(iv) On the Scope of
Section 271C read with Section 273B:
35. Section 271C inter
alia states that if any person fails to deduct the whole or any part of the tax
as required by the provisions of Chapter XVII-B then such person shall be
liable to pay, by way of penalty, a sum equal to the amount of tax which such
person failed to deduct. In these cases we are concerned with Section
271C(1)(a). Thus Section 271C(1)(a) makes it clear that the penalty leviable
shall be equal to the amount of tax which such person failed to deduct. We
cannot hold this provision to be mandatory or compensatory or automatic because
under Section 273B Parliament has enacted that penalty shall not be imposed in
cases falling thereunder. Section 271C falls in the category of such cases.
Section 273B states that notwithstanding anything contained in Section 271C, no
penalty shall be imposed on the person or the assessee for failure to deduct
tax at source if such person or the assessee proves that there was a reasonable
cause for the said failure. Therefore, the liability to levy of penalty can be
fastened only on the person who do not have good and sufficient reason for not
deducting tax at source. Only those persons will be liable to penalty who do
not have good and sufficient reason for not deducting the tax. The burden, of
course, is on the person to prove such good and sufficient reason. In each of
the 104 cases before us, we find that 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 "Salaries"
being exigible to deduction of tax at source under Section 192 was a nascent
issue. It has not be considered by this Court before. Further, in most of these
cases, the tax- deductor-assessee has not claimed deduction under Section 40(a)(iii)
in computation of its business income. This is one more reason for not imposing
penalty under Section 271C because by not claiming deduction under Section
40(a)(iii), in some cases, higher corporate tax has been paid to the extent of
Rs. 906.52 lacs (see Civil Appeal No. 1778/06 entitled CIT v. The Bank of
Tokyo-Mitsubishi Ltd.). In some of the cases, it is undisputed that each of the
expatriate employees have paid directly the taxes due on the foreign salary by
way of advance tax/self-assessment tax. The tax-deductor-assessee was under a
genuine and bona fide belief that it was not under any obligation to deduct tax
at source from the home salary paid by the foreign company/HO and,
consequently, we are of the view that in none of the 104 cases penalty was leviable
under Section 271C as the respondent in each case has discharged its burden of
showing reasonable cause for failure to deduct tax at source.
VI.
Directions-cum-Conclusion:
36. For the reasons
stated hereinabove, we hold that the TDS provisions in Chapter XVII-B relating
to payment of income chargeable under the head "Salaries", which are
in the nature of machinery provisions to enable collection and recovery of tax
forms an integrated Code with the charging and computation provisions under the
1961 Act, which determines the assessability/taxability of "salaries"
in the hands of the employee-assessee.
Consequently, Section
192(1) has to be read with Section 9(1)(ii) read with the Explanation thereto.
Therefore, if any payment of income chargeable under the head
"Salaries" falls within Section 9(1)(ii) then TDS provisions would
stand attracted. In this batch of civil appeals, identification of the
recipient of salary is not in dispute. In our view, therefore, the
tax-deductor- assessee (respondent(s)) were duty bound to deduct tax at source
under Section 192(1) from the Home Salary/special allowance(s) paid abroad by
the foreign company, particularly when no work stood performed for the foreign
company and the total remuneration stood paid only on account of services
rendered in India during the period in question. As stated above, in this
matter, we have before us 104 civil appeals. We are directing the AO to examine
each case to ascertain whether the employee-assessee (recipient) has paid the
tax due on the Home Salary/special allowance(s) received from the foreign
company. In case taxes due on Home Salary/special allowance(s) stands paid off
then the AO shall not proceed under Section 201(1). In cases where the tax has
not been paid, the AO shall proceed under Section 201(1) to recover the
shortfall in the payment of tax.
37. Similarly, in
each of the 104 appeals, the AO shall examine and find out whether interest has
been paid/recovered for the period between the date on which tax was deductible
till the date on which the tax was actually paid.
If, in any case,
interest accrues for the aforestated period and if it is not paid then the
Adjudicating Authority shall take steps to recover interest for the aforestated
period under Section 201(1A).
38. For the reasons
mentioned hereinabove, however, no penalty proceedings under Section 271C shall
be taken in any of these cases as the issue involved was a nascent issue.
Accordingly we quash the penalty proceedings under Section 271C.
39. Subject to what
is stated above, the civil appeals filed by the Department stand partly allowed
with no order as to costs.
.............................J.
(S. H. Kapadia)
.............................J.
(Aftab Alam)
New
Delhi;
March
25, 2009.
ITEM NO. 1-A ( For
COURT No.5 SECTION IIIA Judgment ) SUPREME COURT OF INDIA RECORD OF PROCEEDINGS
Civil Appeal No. 5114 of 2007 Commr. of Income Tax, New Delhi .. Appellant(s)
Versus M/s Eli Lilly & Company (India) P. Ltd. .. Respondent(s) WITH Civil
Appeal No. 5152 of 2005 Civil Appeal No. 1775 of 2006 Civil Appeal No. 1782 of
2006 Civil Appeal No. 1776 of 2006 Civil Appeal No. 1778 of 2006 Civil Appeal
No. 1780 of 2006 Civil Appeal No. 1786 of 2006 Civil Appeal No. 1783 of 2006
Civil Appeal No. 1785 of 2006 Civil Appeal No. 1787 of 2006 Civil Appeal No.
1789 of 2006 Civil Appeal No. 1791 of 2006 Civil Appeal No. 1792 of 2006 Civil
Appeal No. 1793 of 2006 Civil Appeal No. 1794 of 2006 Civil Appeal No. 1795 of
2006 Civil Appeal No. 1796 of 2006 Civil Appeal No. 1784 of 2006 Civil Appeal
No. 1920 of 2006 Civil Appeal No. 2187 of 2006 Civil Appeal No. 2211 of 2006
Civil Appeal No. 2210 of 2006 Civil Appeal No. 2480 of 2006 Civil Appeal No.
5263 of 2006 Civil Appeal No. 5646 of 2006 Civil Appeal No. 107 of 2007 Civil
Appeal No. 347 of 2007 Civil Appeal No. 161 of 2007 Civil Appeal No. 159 of
2007 Civil Appeal No. 156 of 2007 Civil Appeal No. 352 of 2007 Civil Appeal No.
428 of 2007 Civil Appeal No. 434 of 2007 Civil Appeal No. 342 of 2007 Civil
Appeal No. 344 of 2007 Civil Appeal No. 343 of 2007 Civil Appeal No. 345 of
2007 Civil Appeal No. 346 of 2007 Civil Appeal No. 349 of 2007 Civil Appeal No.
816 of 2007 Civil Appeal No. 1346 of 2007 Civil Appeal No. 1357 of 2007 Civil
Appeal No. 1345 of 2007 Civil Appeal No. 1355 of 2007 Civil Appeal No. 1352 of
2007 Civil Appeal No. 1351 of 2007 Civil Appeal No. 1354 of 2007 Civil Appeal
No. 1346 of 2007 Civil Appeal No. 1343 of 2007 Civil Appeal No. 2295 of 2007
Civil Appeal No. 2293 of 2007 49 Civil Appeal No. 1634 of 2007 Civil Appeal
No. 1956 of 2007 Civil Appeal No. 1948 of 2007 Civil Appeal No. 1943 of 2007
Civil Appeal No. 1939 of 2007 Civil Appeal No. 1961 of 2007 Civil Appeal No.
2121 of 2007 Civil Appeal No. 2294 of 2007 Civil Appeal No. 2292 of 2007 Civil
Appeal No. 4173 of 2007 Civil Appeal No. 4516 of 2007 Civil Appeal No. 4517 of
2007 Civil Appeal No. 3212 of 2007 Civil Appeal No. 3124 of 2007 Civil Appeal
No. 3126 of 2007 Civil Appeal Nos. 5110-5111 of 2007 Civil Appeal No. 264 of
2007 Civil Appeal No. 293 of 2008 Civil Appeal No. 292 of 2008 Civil Appeal No.
4477 of 2007 Civil Appeal No. 4082 of 2007 Civil Appeal No. 1037 of 2008 Civil
Appeal No. 3523 of 2007 Civil Appeal No. 1462 of 2008 Civil Appeal No. 5288 of
2007 Civil Appeal No. 5295 of 2007 Civil Appeal No. 5986 of 2007 Civil Appeal
No. 5742 of 2007 Civil Appeal No. 5749 of 2007 Civil Appeal No. 3587 of 2008
Civil Appeal No. 3616 of 2007 Civil Appeal No. 1769 of 2006 Civil Appeal
No.1890 of 2009 @ SLP(C) No. 21443 of 2006 Civil Appeal No.1891 of 2009 @
SLP(C) No. 3768 of 2007 Civil Appeal No.1892 of 2009 @ SLP(C) No. 3769 of 2007
Civil Appeal No.1893 of 2009 @ SLP(C) No. 3770 of 2007 Civil Appeal No.1894 of
2009 @ SLP(C) No. 3771 of 2007 Civil Appeal No.1895 of 2009 @ SLP(C) No. 3946
of 2007 Civil Appeal No.1896 of 2009 @ SLP(C) No. 3947 of 2007 Civil Appeal
No.1897 of 2009 @ SLP(C) No. 5536 of 2007 Civil Appeal No.1898 of 2009 @ SLP(C)
No. 5646 of 2007 Civil Appeal No.1899 of 2009 @ SLP(C) No. 7021 of 2007 Civil
Appeal No.1900 of 2009 @ SLP(C) No. 9641 of 2007 Civil Appeal No.1901 of 2009 @
SLP(C) No. 9637 of 2007 Civil Appeal No.1902 of 2009 @ SLP(C) No. 1953 of 2009
Civil Appeal No.1903 of 2009 @ SLP(C) No. 2621 of 2009 Civil Appeal No.1906 of
2009 @ SLP(C) No. 8879 of 2008 Civil Appeal No.1907 of 2009 @ SLP(C) No. 28553
of 2008 Civil Appeal No.1904 of 2009 @ SLP(C) No.7307 of 2009 (CC 17118) Civil
Appeal No.1905 of 2009 @ SLP(C) No.7308 of 2009 (CC 17308) Civil Appeal No.1908
of 2009 @ SLP(C) No.7310 of 2009 (CC 1584) 50
DATE : 25/03/2009 These matters were called on for pronouncement of judgment
today.
For Appellant(s) Ms.
Arti Gupta, Adv.
Ms. Vismai Rao, Adv.
Mr. B.V. Balram Das,
Adv.
For Respondent(s)/
Mr. Ajay Vohra, Adv.
appearing parties:
Ms. Kavita Jha, Adv.
Mr. Sandeep S.
Karhail, Adv.
Ms. Mahua Kalra, Adv.
Mr. R.S. Suri, Adv.
Mr. Jagjit Singh
Chhabra, Adv.
Mr. Kamal Mohan
Gupta, Adv.
Mr. P.V. Yogeswaran,
Adv.
Mr. Bhargava V.
Desai, Adv.
Mr. Vikas Mehta, Adv.
Mr. N. Ganpathy, Adv.
Mr. Dhruv Mehta, Adv.
for M/s K.L. Mehta & Co.,Advs.
Mr. Amboj Kumar
Sinha, Adv.
Mr. S. Prasad, Adv.
Mr. Rajinder Mathur,
Adv.
Mr. P.N. Gupta, Adv.
Mr. Chandra Prakash
Pandey, Adv.
Mr. Anuvrat Sharma,
Adv.
Mr. O.P. Khaitan,
Adv. for M/s Khaitan & Co.,Advs.
--- Hon'ble Mr.
Justice S.H. Kapadia pronounced the judgment of the Bench 51
comprising his Lordship and Hon'ble Mr. Justice Aftab Alam.
Delay condoned.
Leave granted.
The appeals filed by
the Department are partly allowed in terms of the signed judgment which is
placed on the file. There shall be no order as to costs.
Back