Honorable Supreme Court has delivered a landmark judgment on the issue of TDS recently in the following case:

Commissioner of Income-tax, New Delhi Versus Eli Lilly & Company (India) Pvt. Ltd. reported in 2009 -TMI - 32752 - SUPREME COURT

Facts of the Case:

"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."

Decision:

"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."

Commissioner of Income-tax, New Delhi Versus Eli Lilly & Company (India) Pvt. Ltd. - 2009 -TMI - 32752 - SUPREME COURT

TDS on foreign-paid salaries applies where services are rendered in India, obliging the payer to deduct tax and enabling recovery. TDS for salary payments functions as an integrated collection mechanism tied to the taxability of salary income in India; when remuneration paid by a foreign employer corresponds solely to services rendered in India, those foreign-paid components (home salary and special allowances) attract TDS and the payer is obliged to deduct tax. Assessing authorities must examine whether tax on such components has been paid, recover unpaid tax as an assessee-in-default, and assess interest for the period between deductibility and payment; penalty proceedings were not to be pursued given the nascent nature of the issue.