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TMI Blog2009 (3) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... rmaceutical 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions:- 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian 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, Netherlan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - "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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 "interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econded 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 issuewhether 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 S ..... 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