TMI Blog2009 (3) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 opti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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" clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. "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 - "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 (no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable 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: (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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s" 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x 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-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f "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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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