2009 (3) TMI 33 - SC - Income Tax

TDS on salary paid abroad under s192(1) read with s9(1)(ii): employers must deduct; s201(1) recovery rules clarified

Commissioner of Income-tax, New Delhi Versus Eli Lilly & Company (India) Pvt. Ltd.

SC held that TDS provisions in Chapter XVII-B are machinery linked to charging provisions and that s192(1) must be read with s9(1)(ii) (and its ... Deduction of 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 - Nature of machinery provisions to enable collection and recovery of taxes - determine the assessability of income chargeable under the head 'Salaries' in the hands of the recipient - Scope of Section 271C read with Section 273B - HELD THAT:- 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. 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. Appeals filed by the Department stand partly allowed. Issues Involved:1. Whether TDS provisions in Chapter XVII-B are independent of the charging provisions determining the assessability of income under 'Salaries.'2. Whether TDS provisions apply to payments made abroad by a foreign company to expatriates rendering services in India.3. The scope and interpretation of Section 192(1) regarding TDS on salaries.4. The applicability of Section 201(1) and Section 201(1A) regarding interest and default.5. The applicability of penalties under Section 271C read with Section 273B for failure to deduct TDS.Detailed Analysis:(i) Independence of TDS Provisions from Charging Provisions:21-30: The court clarified that the judgment is confined to the question of deductibility of tax from 'income chargeable under the head 'Salaries'' under Section 192(1). The court emphasized that the Income-tax Act, 1961, is an integrated code where the machinery provisions for collection and recovery of tax are interlinked with the charging provisions. The court held that TDS provisions are not independent of the charging provisions. The Act's scheme applies to both the amount paid, which bears the character of 'income,' and gross sums, which may not be entirely income in the recipient's hands. The court concluded that the TDS provisions are meant for tentative deduction of income-tax subject to regular assessment.(ii) Applicability of TDS Provisions to Payments Made Abroad:31-33: The court analyzed Section 192(1) and Section 9(1)(ii) with its Explanation. It concluded that Section 192(1) requires deduction of tax on 'any income chargeable under the head 'Salaries'' at the time of payment. The court highlighted the similarity between Section 192(1) and Section 40(a)(iii) and emphasized the importance of the Explanation to Section 9(1)(ii), which equates 'earned in India' to 'services rendered in India.' The court held that if the home salary/special allowance payment made by the foreign company abroad is for services rendered in India, it would fall under Section 192(1) read with Section 9(1)(ii).(iii) Scope and Interpretation of Section 192(1):34-35: The court clarified that Section 192(1) requires the tax-deductor-assessee to estimate the income of the assessee-employee under the head 'Salaries' and deduct tax accordingly. The court emphasized that Section 192(1) has to be read with Section 9(1)(ii) and that the TDS provisions are not independent of the charging provisions. The court concluded that the tax-deductor-assessee was statutorily obliged to deduct tax under Section 192(1) if the payment was for services rendered in India.(iv) Applicability of Section 201(1) and Section 201(1A):36-37: The court explained that Section 201(1) and Section 201(1A) are independent provisions. Interest under Section 201(1A) is compensatory for withholding tax that should have gone to the exchequer and is mandatory. The court clarified that interest under Section 201(1A) can only be levied when a person is declared as an assessee-in-default under Section 201(1). The period for which interest is charged starts from the date of deductibility till the date of actual payment of tax.(v) Applicability of Penalties under Section 271C read with Section 273B:38-39: The court held that Section 271C imposes a penalty for failure to deduct tax at source, but Section 273B provides that no penalty shall be imposed if there was a reasonable cause for the failure. The court found that in the 104 cases before it, the non-deduction of tax at source was due to a bona fide misunderstanding of the law, which constituted a reasonable cause. Therefore, the court quashed the penalty proceedings under Section 271C.Conclusion:The court held that the TDS provisions in Chapter XVII-B are not independent of the charging provisions. The tax-deductor-assessee was obliged to deduct tax at source under Section 192(1) for home salary/special allowances paid abroad by the foreign company if the payment was for services rendered in India. The court directed the Assessing Officer to examine each case to ascertain whether the tax due on the home salary/special allowances was paid by the employee-assessee. If the tax was paid, the AO should not proceed under Section 201(1). If not, the AO should recover the shortfall. The court also directed the AO to recover interest under Section 201(1A) if not already paid. No penalty proceedings under Section 271C shall be taken as the issue involved was a nascent issue. The civil appeals filed by the Department were partly allowed with no order as to costs.