Tax Deduction at Source cannot be recharacterised as grossed-up salary or taxable perquisite where no employment with Indian payer exists

Where a technician was not employed by the Indian payer and received no salary from it, the Indian company's contractual remittance to the foreign employer could not be recharacterised as grossed-up, tax-free salary in the technician's hands. The court treated the Indian company's deduction of tax at source under section 195 as compliance with the payer's withholding obligation, not as a taxable perquisite arising to the assessee. On those facts, the attempt to tax the deducted amount as a perquisite failed, and the reference was answered in favour of the assessee.

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Issues: Whether the salary received by a technician of an Italian company could be grossed up and treated as tax-free salary in the hands of the assessee, and whether the tax deducted by the Indian company under section 195 of the Income-tax Act on payments made to the foreign company could be treated as a taxable perquisite in the assessee's hands.

Analysis: The assessee was not an employee of the Indian company and received no salary from it. The contractual arrangement showed that the Indian company was only required to make payments to the Italian company, while the technician's salary was payable by the Italian employer in Italy. The Indian company complied with section 195 by deducting tax at source on payments made to the foreign company. On these facts, there was no basis to treat the Indian company's remittance as a tax-free salary paid to the assessee or to gross up the income on that footing.

Conclusion: The attempt to gross up the income was unsustainable, and the tax deducted by the Indian company could not be treated as a taxable perquisite in the assessee's hands. The finding against the Revenue was affirmed.

Final Conclusion: The reference was answered in favour of the assessee and against the Revenue, with costs awarded to the assessee.

Ratio Decidendi: Where the assessee is not an employee of the Indian payer and the Indian company merely makes contractual payments to a foreign company while deducting tax at source under section 195 of the Income-tax Act, such deduction cannot, by itself, be treated as grossed-up salary or a taxable perquisite in the assessee's hands.

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