Supreme Court confirms liability to deduct tax on offshore
salary paid to non-resident employees for services rendered in
India
CIT vs Eli Lilly and Company (India) Pvt. Ltd (Supreme Court)
While disposing off a batch of appeals by the Revenue Department (“the
department”) in cases of Eli Lilly and Company, Mitsui and Co and Ericsson
Communications, the Supreme Court delivering a landmark decision, has
held that salaries paid offshore (in the home country) to a non-resident
employee (“expatriate”) for rendering services in India, should also be liable
for withholding tax. The Income tax Act, 1961 (‘the Act’) fastens a liability on
the expatriate to pay tax on salaries in respect of services rendered in India,
irrespective of the place of receipt of such salary. But the contentious issue
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2009
was when the expatriates were paid Indian salary by the Indian entity to
Events
which they were seconded and tax was deducted on such Indian salary,
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1. Interactive workshop on “Successful EPC
Contracting - Fiscal and Legal Challenges”,
April 16-18, New Delhi
2. Asia Tax Executives’ Forum, May 13-14, 2009
in Singapore
3. Joint meeting of the USA and India branches
of the International Fiscal Association, May
27-29, 2009, Fairmont, Washington
whether or not salary paid in their country of residence by their foreign
principal employer (“home salary”) should also be included for deduction of
tax or not. The Supreme Court confirmed that such an obligation exists as
per section 192 of the Act.
Background and facts of the case
The common issue in the batch of cases was that the expatriates were
seconded to the Indian joint venture (“JV”) or Indian branch office (“BO”) by
the Foreign Enterprise (“FE”). The JV/BO had deducted tax at source on
the salary payable in India (“Indian salary”) as per section 192 of the Act,
RECENT EVENTS
1. Gazing into the crystal ball – M&A in the
IT/ITES industry in 2009
2. Taxand Global Conference 2009, in Miami,
USA
3. USIBC roundtable discussion, Washington
4. BMR Singapore hosts Tax Network Group
but did not deduct tax on the home salary paid to expatriates. The
department took a position that as per section 192 of the Act, the JV/BO
should have deducted tax on the home salary as well and remitted it to the
Indian Government. The department also initiated penal proceedings for
non-deduction of tax at source. The tribunal and the High Court ruled in
favour of the JV/BO and the department appealed to the Supreme Court.
Bobby Parikh, Mumbai
Phone: +91 22 3021 7010
Email ID: bobby.parikh@bmradvisors.com
Key questions before the Supreme Court
Mukesh Butani, New Delhi
Phone: +91 11 3081 5010
Email ID: mukesh.butani@bmradvisors.com
Whether the JV/BO is liable to deduct Indian tax on home salary and
whether provisions dealing with deduction of tax at source, which are in
nature of machinery provisions for collection of taxes, are independent of
Rajeev Dimri, New Delhi
Phone: +91 11 3081 5050
Email ID: rajeev.dimri@bmradvisors.com
the charging provisions, which determines chargebility of income under the
head “Salaries” in the hands of the expatriates.
Abhishek Goenka, Bangalore
Phone: +91 80 4032 0100
Email ID: abhishek.goenka@bmradvisors.com
Arguments of the Revenue
•
Section 192 of the Act imposes obligation of deducting tax on “any
person” responsible for paying salary to deduct tax at source
Ravi K, Chennai
Phone: +91 44 4298 7000
Email ID: k.ravi@bmradvisors.com
and therefore, every person responsible for paying salary taxable in
India should withhold and remit the tax to the Government, irrespective
of the place of payment of such salary.
•
Gagan Malik, Singapore
Phone: +65 6408 8004
Email ID: gagan.malik@bmradvisors.com
Section 192 of the Act imposes a joint and several obligation on all
persons, who are responsible for paying any income chargeable under
the head ‘salaries’ to an employee in India.
•
The obligation of JV/BO has to be interpreted coextensively and in
respect to the entire salary income of expatriate since the entire salary
is deemed to accrue or arise in India in respect of services rendered in
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India as per section 9(1)(ii) of the Act.
•
Imposition of penalty under section 271C is in nature of civil liability and
the bonafide misunderstanding of law, does not satisfy the test of
“reasonable cause”.
Arguments of the tax payer
•
The provisions for deduction of tax at source have no extra territorial
operation and hence cannot apply to payment made abroad by a
•
person located outside India.
Contributors to this edition:
The FE and BO are to be treated as separate and independent entities
Sriram Seshadri
Ashka Dave
for the purpose of applicability of section 192 of the Act and the BO has
deducted and remitted the tax on the Indian salary, for which it is
responsible for paying to the expatriate.
•
Though the expatriates were seconded to the JV/BO as employees,
they continued to remain on the rolls of FE. As per section 192(2) of the
Act, when an employee is in employment with more than one employer,
he has an option to declare the salary received from one employer to
the other and only if declared, the other employer shall be liable to
consider the salary paid by the first employer while deducting tax at
source. In the absence of such an option being exercised by the
expatriates, the JV/BO is not liable for deduction of tax on the home
salary.
•
The obligation to deduct tax is on the person responsible for making
payment and does not extend to deduction of tax out of salary paid by
other person, which is not on account of or on behalf of the first person.
Therefore, the JV/BO did not have any obligation to deduct tax at
source, since the home salary was not paid on their behalf by the FE.
•
The TDS provisions are in nature of machinery for easy collection and
recovery of tax and these are independent of charging provisions. Each
expatriate, subject to tax as per the charging provision, has paid the
taxes due on the home salary as well Indian salary by way of advance
tax or self assessment tax and therefore, there is no loss of revenue to
the Government.
•
The issue in the appeal being nascent, not been considered by the
Apex court earlier, no penal consequences can be imposed.
Decision of the Supreme Court
•
Where the home salary paid to the expatriates 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 expatriate
in India in terms of section 9(1)(ii) of the Act. Section 9 is not only a
machinery section but also provides chargeability of tax on incomes
•
which are deemed to accrue or arise in India.
The TDS provisions have extra territorial operation in respect of
subject matters permissible under Article 245 of the Constitution
and the provisions are enforceable within the area where the Act
extends through the machinery provided under it.
•
The provisions relating to deduction of tax at source, which are in
nature of machinery provisions to enable collection and recovery of tax
forms an integrated code with the charging provisions which
determines charge to tax in the hands of expatriates. If the services of
employment are rendered in India, the place of receipt or actual
accrual of salary is immaterial. Section 192(1) of the Act has to be
read with section 9(1)(ii) of the Act.
•
Where the home salary is paid and it is found that no services have
been performed outside India, such payment shall be “deemed to
accrue or arise in India” and the JV/BO is statutorily obliged to deduct
tax under section 192(1) of the Act.
•
Industry Groups:
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The Assessing Officer (“AO”) has been directed to verify whether the
expatriate has paid the tax due on home salary and if so, then the AO
should not proceed under section 201(1) of the Act and if not, the AO
should proceed under section 201(1) of the Act to recover the shortfall
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in the tax payment.
•
The AO has also been directed to examine whether interest has been
paid / recovered for the period between the date on which the tax was
deductible till the date on which the tax was actually paid. If the
interest has not been paid, the AO has been directed to take steps
under section 201(1A) of the Act.
•
As far as levy of penalty is concerned, the Court held that the nondeduction of tax at source has occurred on account of a controversial
addition. It was a nascent issue, not been considered by the Supreme
Court earlier. The JV/BO was under the bonafide belief that it was not
under any obligation to deduct tax at source from home salary and the
expatriates had also paid the advance tax / self assessment tax.
Hence, there was a reasonable cause for default in deducting tax at
source and therefore, penalty should not be levied.
•
The Apex Court has also clarified that the decision is confined strictly
to deductibility of tax from the “income chargeable under the head
“salaries” under section 192(1) of the Act, which unlike other sections
in Chapter XVII-B required such deduction on “estimated income”
chargeable under head salary and at the time of payment of salary.
BMR comments and analysis
This is a landmark decision as it provides clarity on the requirement to
deduct tax on payment of home salary to expatriate employees rendering
services in India. This decision has the potential of encouraging the
Revenue to intensely examine expatriate taxation issues in assessments
of Indian entities housing expatriates. It may also encourage the
Revenue to examine closely the number of days of services rendered in
India and also whether the expatriate has rendered any service at all to
the foreign employer, while determining the component of income
taxable in India. Such an observation would highlight service PE
exposure.
One of the challenges for the Indian entity to whom an expatriate is
seconded has been availability of adequate salary details to compute the
tax component on home salary. It is now imperative that the tax aspect is
adequately addressed at the time of seconding the expatriate to an
Indian entity and proper database is built for exchange of all information
about compensation of the expatriate.
The other challenge is that some companies pay a meager allowance in
India to the expatriate, aimed at compensating the bare living expenses
in India, while retaining sizeable portions of the salary as home salary. In
such a case, administering withholding tax in India for tax arising on the
home salary would be a challenge, given the small amount of
compensation payable in India.
The other historical challenges have been the differences in the definition
of salary, the difference in tax years, more than two tax jurisdictions
coming in to play, etc and all these have contributed and added to the
burden of tax administration of expatriates.
This decision may also set the companies to examine the possibility of
cross-charging home salary to Indian books, as taxes are withheld in
India without backing claim of expenses. Some companies have been
following the practice that home salary is borne by the foreign employer
and Indian salary is borne by the Indian entity and the deduction of each
portion of the salary was claimed only by respective entities.
Consequently, the non-deduction of tax on home salary did not attract
disallowance of expense in the hands of the Indian entity under section
40(a)(i) of the Act. But as a consequence of this decision, some
companies may take home salary expense as well in their books, to the
extent the salary is paid for services rendered in India, on which tax has
also been deducted at source. However, adequate thought would be
needed where Indian entity is a permanent establishment because
cross-charging home salaries of all expatriates as a policy, would take
away the short stay exemption for some of the employees, whose stay is
less than the threshold 183 days for treaty exemption purposes. Hence,
adequate care and reflection would be needed in finalizing the tax
policies related to expatriates in India.
Also, the Apex Court has (Para 23) observed that the scheme of tax
deduction provisions apply not only to the amount paid, which bears the
character of income such as salaries, dividends, interest on securities
etc, but the said provisions also apply to gross sums, the whole of which
may not be income or profits in the hands of the recipient, such as
payment to contactor and sub contactor. This has the potential of being
interpreted to mean that all re-imbursements would also be subject to
withholding tax.
It is interesting to note that the Supreme Court has clarified that the
decision is applicable only to withholding tax pertaining to salary income
and it will not be applicable for the Vodafone case. However, the
observations of the Supreme Court on extraterritorial operation of the Act
may be relied upon by the department in Vodafone case.
AWARDS AND RECOGNITION
BMR’s M&A practice among top 25 in India League Table
BMR has been ranked among the top M&A practices in India in the recently
concluded annual India League Table survey 2008 conducted by Thomson
Reuters.
For more details, please click here.
BMR is India Transfer Pricing Firm of the Year at ITR’s Asia Awards
2008
BMR has emerged as the India Transfer Pricing Firm of the year at the
International Tax Review’s Asia Awards 2008. BMR received this award for
the second consecutive year and was chosen over three of the Big 4 Firms.
For more details, please click here.
BMR is Tier 1 Firm in ITR's World Tax Guide 2009
In the latest World Tax Guide 2009 brought out by the international Tax
Review, BMR has been ranked a Tier 1 Firm.
This ranking is based on a rigorous process that involves research among
all participating Firms, and interviews with their representatives.
For more details, please click here.
EVENTS
UPCOMING EVENTS
Interactive workshop on “Successful EPC Contracting - Fiscal and
Legal Challenges”, April 16-18, New Delhi
BMR Advisors, in collaboration with Infraline, will host the fifth conference
and interactive workshop on “Successful EPC Contracting - Fiscal and
Legal Challenges" from April 16-18, 2009, at The Imperial hotel, New Delhi.
For more details, please click here.
Asia Tax Executives’ Forum, May 13-14, 2009 in Singapore
The International Tax Review, supported by the Asia-Pacific member Firms
of the Taxand network, will organize the fourth Asia Tax Executives’ Forum
2009 on May 13-14, 2009 at Shangri La hotel in Singapore.
For more details, please click here.
Joint meeting of the USA and India branches of the International
Fiscal Association, May 27-29, 2009, Fairmont, Washington
The US and India branches of IFA will hold the second joint conference on
May 27-29, 2009, in Washington DC, USA. Mukesh Butani and Shefali
Goradia, Partners at BMR Advisors will be key panelists at the conference.
For more details, please click here.
RECENT EVENTS
Gazing into the crystal ball – M&A in the IT/ITES industry in 2009,
Mumbai
The National Association for Software and Services Companies, Nasscom,
organized the India Leadership Forum 2009 on February 11-13, 2009 in
Mumbai. Bobby Parikh, Managing Partner, BMR was invited as a key
speaker at the conference.
For more details, please click here
Taxand Global Conference 2009, Miami
The 2009 Global Taxand Conference was held at The Westin Diplomat
Resort and Spa in Miami, Florida, from February 18 to 20, 2009. The
conference, hosted by Alvarez & Marsal Taxand, LLC, the US member Firm
of Taxand, featured informative speakers and engaging plenary sessions
addressing the clients' latest tax issues.
For more details, please click here.
USIBC roundtable discussion, Washington
US India Business Council, supported by BMR, organized a roundtable
discussion at US Chamber of Commerce, Washington USA, on February
17, 2009.
BMR Singapore hosts Tax Network Group
BMR Singapore was recently invited to organize a session on “India tax
update – Recent challenges” for Tax Network Group in Singapore. The
session witnessed impressive participation from many multinational
organizations. The session was very well-received and elicited encouraging
feedback from participants.
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This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of
preparation and does not express views or expert opinions of BMR & Associates. The newsletter is meant for general guidance and no
responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be
accepted by BMR & Associates. It is recommended that professional advice be sought based on the specific facts and circumstances. This
newsletter does not substitute the need to refer to the original pronouncements.
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