Commr.Of Income Tax,New Delhi vs M/S Eli Lilly & Company (India) P.Ltd

Commissioner of Income-tax, New Delhi ... Appellant(s)

versus

M/s Eli Lilly & Company (India) Pvt. Ltd. ... Respondent(s)

with

C.A.No.5152/2005, C.A.No.1775/2006, C.A.No.1782/2006, C.A.No.1776/2006, C.A.No.1778/2006, C.A.No.1780/2006, C.A.No.1786/2006, C.A.No.1783/2006, C.A.No.1785/2006, C.A.No.1787/2006, C.A.No.1789/2006, C.A.No.1791/2006, C.A.No.1792/2006, C.A.No.1793/2006, C.A.No.1794/2006, C.A.No.1795/2006, C.A.No.1796/2006, C.A.No.1784/2006, C.A.No.1920/2006, C.A.No.2187/2006, C.A.No.2211/2006, C.A.No.2210/2006, C.A.No.2480/2006, C.A.No.5263/2006, C.A.No.5646/2006, C.A.No.107/2007, C.A.No. 347/2007, C.A.No.161/2007, C.A.No.159/2007, C.A.No.156/2007, C.A.No.352/2007, C.A.No.428/2007, C.A.No.434/2007, C.A.No.342/2007, C.A.No.344/2007, C.A.No.343/2007, C.A.No.345/2007, C.A.No.346/2007, C.A.No.349/2007, C.A.No. 816/2007, C.A.No.1348/2007, C.A.No.1357/2007, C.A.No.1345/2007, C.A.No.1355/2007, C.A.No.1352/2007, C.A.No.1351/2007, C.A.No.1354/2007, C.A.No.1346/2007, C.A.No.1343/2007, C.A.No. 2295/2007, C.A.No.2293/2007, C.A.No.1634/2007, C.A.No.1956/2007, C.A.No.1948/2007, C.A.No.1943/2007, C.A.No.1939/2007, C.A.No.1961/2007, C.A.No. 2121/2007, C.A.No.2294/2007, C.A.No.2292/2007, C.A.No. 4173/2007, C.A.No.4516/2007, C.A.No.4517/2007, C.A.No.3212/2007, C.A.No.3124/2007, C.A.No.3126/2007, C.A.No. 5110 - 5111/2007, C.A.No. 264/2008, C.A.No. 293/2008, C.A.No. 292/2008, C.A.No.4477/2007, C.A.No.4082/2007, C.A.No.1037/2008, C.A.No.3523/2007, C.A.No.1462/2008, C.A.No.5288/2007, C.A.No.5295/2007, C.A.No.5986/2007, C.A.No.5742/2007, C.A.No.5749/2007, C.A.No.3587/2008, C.A.No.3616/2007, C.A.No.1769/2006, C.A.No. 1890/2009 @ SLP(C)No.21443/2006,

1 C.A. No. 1891/2009 @ SLP(C)No. 3768/2007, C.A. No. 1892/2009 @ SLP(C)No. 3769/2007, C.A. No. 1893/2009 @ SLP(C)No. 3770/2007, C.A. No. 1894/2009 @ SLP(C)No. 3771/2007, C.A. No. 1895/2009 @ SLP(C)No. 3946/2007, C.A. No. 1896/2009 @ SLP(C)No. 3947/2007, C.A. No. 1897/2009 @ SLP(C)No. 5536/2007, C.A. No. 1898/2009 @ SLP(C)No. 5646/2007, C.A. No. 1899/2009 @ SLP(C)No. 7021/2007, C.A. No. 1900/2009 @ SLP(C)No. 9641/2007, C.A. No. 1901 /2009 @ SLP(C)No. 9637/2007, C.A. No. 1902/2009@ SLP(C)No. 1953/2009 C.A. No. 1903/2009 @ SLP(C)No. 2621/2009, C.A. No. 1906/2009 @ SLP (C)No. 8879/2008, C.A. No. 1907/2009 @ SLP(C)No.28553/2008, C.A. No. 1904/2009 @ SLP(C)No. 7307/2009 (CC.No. 17118), C.A. No. 1905/2009 @ SLP(C)No. 7308/2009 (CC.No.17308), C.A. No. 1908/2009 @ SLP(C)No. 7310/2009 (CC No. 1584).

JUDGMENT

S.H. KAPADIA, J.

Delay condoned.

2. Leave granted.

3. In this batch of civil appeals, the question which arises for

determination is - whether TDS provisions in Chapter XVII-B, which are in

the nature of machinery provisions to enable collection and recovery of taxes,

are independent of the charging provisions which determines the assessability

of income chargeable under 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

2 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 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.

3

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.

6. The AO held that the respondent herein, viz., the tax-deductor-

assessee, was an "assessee-in-default" under Section 201 for failure to deduct

tax at source from out of Home Salary paid by the said Foreign Company

outside India and levied interest under Section 201(1A).

7. The Tribunal and the High Court, however, held that the tax-

deductor-assessee was not under statutory obligation to deduct tax at source

on the Home Salary paid by the said Foreign Company under Section 192 as

it was not paid by the Joint Venture Company in India and consequently the

said Joint Venture was not an "assessee-in-default" under Section 201(1) of

4 the 1961 Act. Hence, the Department has come to this Court by way of these

Civil Appeals.

8. To complete the chronology of events, we may state that in some of

the cases herein the Department has levied penalty under Section 271C of the

1961 Act for failure to deduct tax under Section 192(1) from out of Home

Salary paid outside India by the Head Office ("HO") to the expatriates

deputed to the Branch Office(s) in India which penalty was set aside on the

ground that the expatriates exercised dual employment and that there was no

obligation on the Branch Office to deduct tax under Section 192(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"

5

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

this connection, learned counsel submitted that Section 192(2) advisedly uses

the expression "making the payment". The said sub-section does not use the

expression "making the deduction". These very two expressions, according to

the learned counsel, find place also in Section 192(1), however, the said two

expressions are used in that sub-section in different context. The expression

6 "payment" is used in respect of payment of salary income to the assessee-

employee and the expression "deduction" is used in respect of deduction of

tax. According to the learned counsel, the very fact that Section 192(2)

authorizes the assessee-employee to choose one of the several persons

"making the payment" and not "making the deduction" is an indication that

the obligation under Section 192(1) attaches to "any" person, who is

responsible for making payment of any salary income and is not limited to a

person, who is under an obligation to deduct tax at source. This analyses was

advanced by the learned counsel to counter the arguments of one of the

assessees that Section 192(1) is in two parts, namely, one part relating to the

"obligation" to deduct the tax and the other relating to the "quantum".

According to the learned counsel, on a proper construction of Section 192(1),

the expression "deduct income tax on the amount payable" only qualifies the

quantum of tax to be deducted at source and not the identity of the person

obliged to make the payment. Therefore, according to the learned counsel,

under Section 192 there is a clear obligation to deduct tax on "any" and every

person responsible for paying any salary income to an assessee-employee in

India so long as the said income is exigible to income tax in India. Section

192(2), according to the learned counsel, mitigates the rigours of Section 192

(1). In conclusion, learned counsel submitted that Section 192 imposes a joint

and several obligation on all the persons, who are responsible for paying any

7 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 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.

8

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,

Netherlands B.V. and Ranbaxy Laboratories Ltd.. The foreign partner had

seconded four expatriate(s) to the joint venture in India. They were employee

(s) by the joint venture. They, however, continued to remain on the rolls of

the foreign company. They received home salary outside India from the

foreign partner. The joint venture company deducted tax under Section 192(1)

in respect of the salary paid by it to the expatriate(s) in India, however, no tax

stood deducted in respect of the said home salary paid by the foreign

company. In the circumstances, learned counsel contended that the assessee

herein was under no obligation to deduct tax under Section 192(1) of the

1961 Act from the "home salary", which admittedly was not paid by the

assessee herein. According to the learned counsel, Section 192 enjoins upon

the person responsible for paying salary to deduct tax out of the estimated

income chargeable under the head "salaries", at the time of making payment

thereof. The employer is thus expected to make an honest and bona fide

estimate at the beginning of the year of the income of the employee

chargeable under the head "salaries" and deduct tax at the average rate at the

time of payment of salary on month-to-month basis. Thus, Section 192

requires an estimate of income, inter alia, for the reason that the salary is

9 liable to change during the year on account of increment, pay revision,

payment of bonus, DA etc. and also on account of valuation of perquisites in

kind. Section 192 of the 1961 Act, according to the learned counsel, unlike

other sections in Chapter XVII-B, regulating deduction of tax at source,

requires such deduction to be made on estimated income chargeable under the

head "salaries" and at the time of payment of salary. The obligation under

Section 192(1) is on the person responsible for paying, to deduct tax at source

on the income of the employee 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

10 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 deducting tax at source. According to the learned counsel, the

TDS provisions are in the nature of machinery provisions which enables easy

collection and recovery of tax. The said provisions are independent of the

charging provisions which are applicable to the recipient of income whereas

the TDS provisions are applicable to the payer of income. According to the

learned counsel, therefore, the obligation to deduct tax at source is on the

deductor, which is independent of the assessment of income in the hands of

the expatriate employee(s); the deductor is obliged to deduct tax at source

only from the payment made by the deductor or payment made on his behalf

or on his account. Therefore, according to the learned counsel, each employer

is required to comply with and deduct tax from out of the salaries paid by

such employer. The obligation does not extend to deduction of tax out of

11 salaries paid by any other person, which is not on account of or on behalf of

such employer, notwithstanding that such salaries may have nexus with the

service of the employee with that employer and may be assessable to tax in

India in the hands of the recipient employee. According to the learned

counsel, on facts, the payment of salary by the foreign company in

Netherlands was not on behalf of or on account of the tax-deductor-assessee

herein and, consequently, it was not under statutory obligation to deduct tax

from the entire salary including the home salary, particularly when the

expatriate(s) did not exercise the option under Section 192(2) requiring the

tax-deductor-assessee herein to deduct tax from their aggregate salary

income. Lastly, learned counsel submitted that each of the expatriate

employee(s) had paid directly the taxes due on the home salary by way of

advance tax/self-assessment tax from time to time. They had filed also the

Return of Income. In such circumstances, 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).

12

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 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 which are assessable to tax in the hands of the recipient,

e.g., salary paid by a foreign employer to his employee in India or

professional fees paid by a client from abroad to his Lawyer/Chartered

Accountant/Technical Consultant in India. These payments, according to the

13 learned counsel, are undoubtedly taxable in India in the hands of the recipient.

Nevertheless, no tax would be deductible at source thereon as they are made

outside India and are not subject to the TDS provisions.

15. On the point of interpretation of Section 192(1), learned counsel

submitted that the said section can be divided into two distinct parts, the first

part consisting of the words "any person responsible for paying any income

chargeable under the head salaries shall, at the time of payment deduct

income tax on the amount payable" and the second part consisting of the

following words:-

"at the average rate of income tax, computed on the basis of the rates in force

in the financial year in which the payment is made, on the estimated income

of the assessee under this head for the financial year."

The submission made by the learned counsel was that the first part of Section

192(1) creates the legal liability to deduct tax at source whereas the second

part provides for the computation of the amount of tax to be deducted.

According to the learned counsel, the first part of Section 192(1) makes it

clear that the tax has to be deducted on the amount payable by the person

concerned. According to the learned counsel, on a plain and correct reading

of Section 192(1), tax is deductible from the amount paid or payable by the

person concerned and he is not at all required to deduct tax in respect of an

14 amount which is paid by any other person. He is also not required to take into

account the amount received by the employee from other sources or to deduct

tax taking into account such other 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 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

15 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). Therefore, in M/s Ericsson Communications Pvt. Ltd. case,

according to the learned counsel, the employer was not liable in law to deduct

tax at source in respect of the "child education payments" made by a Swedish

company to its expatriate employee(s) in Sweden. In the alternative, learned

counsel urged that the assessee was under the bona fide impression that it

was not required to deduct such tax at source in respect of the said expatriate

employee(s), which bona fide impression constituted "reasonable cause" and

therefore, in any event, no penalty could be imposed on the assessee under

Section 271C read with Section 273B of the 1961 Act.

16. Shri M.S. Syali, learned senior counsel appearing on behalf of

M/s Mitsui & Company Ltd. (Civil Appeal No. 5152/05) submitted that the

sole issue in his case was whether the Tribunal/High Court were correct in

law in cancelling the penalty imposed under Section 271C of the 1961 Act. It

was submitted that the retention/continuation payment(s) to expatriates in

Japan by the HO was not taxable in India and/or the provisions of Chapter

XVII-B requiring deduction of tax at source were not applicable to such

16 payment. It was further submitted that the respondent is a foreign company

having its HO in Tokyo. It had, in the relevant financial years in India, a

Project Office and a Liaison Office. The Japanese expatriates were deputed to

the said Establishments as employees. As per the terms of deputation, the said

expatriates were to be paid "salaries" for the services rendered in India by the

respective Establishment, in addition, a retention/continuation was paid in

Japan by the HO to ensure continuity in service. Tax at source was deducted

by the respective Establishment, however, on the retention/continuation paid

in Japan by HO, it was not deducted under Chapter XVII-B of the 1961 Act.

On facts, learned counsel pointed 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) 17 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 but having

been paid by a person responsible outside India, the said earning of salaries

cannot be treated as having accrued or arisen in India. In order to nullify the

effect of the judgment of the Gujarat High Court, according to the learned

counsel, an Amendment was brought in Section 9(1)(ii) adding an

Explanation thereto by which the above decision of the Gujarat High Court

stood overruled. By the said Amendment, it was stipulated that income which

falls under the head "salaries" if earned in India will include such income

payable for services rendered in India. According to the learned counsel, the

insertion with retrospective effect from 1.4.1979 by the Finance Act, 1983,

18 however, was not all inclusive. According to the learned counsel, despite the

said Amendment, amounts paid to foreign technicians for "off period" could

not be taxed as "salary". Being aware that the Explanation, as it stood at that

time, did not include within its purview the salary paid for the "off period",

the Legislature once again amended the Explanation to Section 9(1)(ii),

explaining its scope to include therein the salary paid for the rest period or

leave period, but, only such, which is preceded or succeeded by services

rendered in India and which forms part of the service contract of employment.

However, such Explanation of the scope of Section 9(1)(ii) only took effect

from 1.4.2000 and it applied only in relation to the Assessment Year 2000-

2001 and subsequent years thereto. The Explanation was made expressly

prospective. Therefore, according to the learned counsel, any and everything

paid to an employee does not fall within the scope of Section 9(1)(ii).

According to the learned counsel, it is only when rendition of service takes

place, that the amount is liable to be taxed in India and not otherwise. The

mere fact that the amount flows from the employer 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.

19 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" 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 under the relevant provisions on estimate basis from the

amount payable. The entire salary is not paid in one go and, therefore, out of

the estimated amount payable for that financial year, income for the month

20 under the said head is to be ascertained and accordingly one has to determine

the appropriate average rate. According to the learned counsel, each

Establishment, i.e., the Project Office and the Liaison Office (in this case) has

to be treated as separate and independent entities for the purpose of

applicability of Section 192 and for compliance with other provisions in

Chapter XVII-B and consequently the assessee has not erred therefore in

treating the HO a distinct and separate person responsible for paying.

Therefore, according to the learned counsel, no default could be attributed

merely because the assessee agreed with the Department's understanding of

the said provisions. In this connection, learned counsel placed reliance on

Sections 159A, 203 Rule 114A and Form 49B. He also relied upon Rule 36A

and Rule 37 of the Income-tax Rules, 1962. Learned counsel next contended

that under Section 204(i), the person responsible for paying would cover

either the employer himself or if the employer is a company the company

itself including its principal officer. According to the learned counsel, the

definition contemplates two situations - where the branch is the person

responsible, it acts as the employer, and where centralized compliance is

made, the company is treated as the employer. According to the learned

counsel, in cases where the Liaison Office and the Project Office are separate

employers distinct from the company, as the company itself is not an assessee

paying taxes on its global income, then the employer is not the company. In

21 such cases, the persons who need to comply with the provisions is either the

Project Office or the Liaison Office. In 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 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

22 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 purposes of calculating income-tax under the first proviso to sub-section (5) of section 132, or computing the income-tax chargeable under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section(2) of section 176 or deducting income-tax under section 192 from income chargeable under the head "Salaries" or computation of the "advance tax" payable under Chapter XVII-C in a case not falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year and for the purposes of computation or of the "advance tax" payable under Chapter XVII-C, in a case falling under section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, the rate or rates specified in section 115A or section 115B or section 115BB or section 115BBB or section 115E or section 164 or section 164A or section 167B, as the case may be, or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable.

(ii) for the purposes of deduction of tax under sections 193, 194, 194A, 194B, 194BB and 194D the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year;

(iii) for the purposes of deduction of tax under section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-

23 tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be."

Income deemed to accrue or arise in India.

"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 24 "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-section(1) of section 200:"

...

"(iii) any payment which is chargeable under the head "Salaries", if it is payable-

(A) outside India; or (B) to a non-resident,

and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;"

Deduction at source and advance payment.-

"Section 190:

(1) Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the

25 provisions of this Chapter.

(2) Nothing in this section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of section 4."

Direct Payment.-

"Section 191 :

In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct.

Explanation.- For the removal of doubts, it is hereby declared that if any 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 and such tax has not been paid by the assessee direct, then, such person, the principal officer and the company shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default as referred to in sub-section (1) of section 201 in respect of such tax."

Salary.-

"Section 192.-

(1) Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable 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:

26

(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 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 fails to -

(a) Deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B; or

(b) Pay the whole or any part of the tax as required by or under, -

(i) Sub-section (2) of section 115-O; or (ii) Second proviso to section 194B,

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

27 deduct or pay as aforesaid.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner."

Penalty not to be imposed in Certain Cases:

Section 273B:

"Notwithstanding anything contained in the provisions of clause

(b) of sub-section (1) of section 271, section 271A, section 271AA, section 271B, section 271BA, section 271BB, section 271C, section 271CA, section 271D, section 271E, section 271F, section 271FA, section 271FB, section 271G, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA, or sub-section (1) of section 272BB or sub-section (1A) of section 272BB or sub-

section (1) of section 272BBB or clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure."

IV. Issue:

20. Whether TDS provisions which are in the nature of machinery

provisions enabling collection and recovery of tax are independent of the

charging provision which determines the assessability in the hands of the

employee-assessee (recipient)? In other words, whether TDS provisions

under the Income-tax Act, 1961 are applicable to payments made abroad by

28 the Foreign Company, which payments are for Income chargeable under the

Head "Salaries" 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 in accordance with the provisions

29 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 "interest on securities". Section 194 provides for deduction of tax at

source by the company paying "dividends". Section 194A, Section 194B,

Section 194BB inter alia provides for deduction of tax at source from the

income of interest other than interest on securities, winnings from lotteries,

winnings from horse race respectively. Even with regard to payment to

contractors and sub-contractors, specific provision is made for deducting tax

at source on the basis of payment of such sum as the income-tax on income

comprised therein. Under the 1961 Act, total income for the previous year is

chargeable to tax under Section 4. Section 4(2) inter alia provides that in

respect of income chargeable under Section 4(1), income-tax shall be

deducted at source where it is so deductible under any provision of the 1961

Act. Section 192(1) falls in the machinery provisions. It deals with collection

and recovery of tax. That provision is referred to in Section 4(2). Therefore, if

a sum that is to be paid to the non-resident is chargeable to tax, tax is required

30 to be deducted. The sum which is to be paid may be income out of different

heads of income mentioned in Section 14, that is to say, income from salaries,

income from house property, profits and gains of business, capital gains and

income from other sources. The scheme of the TDS provisions applies 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 contractors and sub-contractors.

The purpose of TDS provisions in Chapter XVII B is to see that the sum

which is chargeable under Section 4 for levy and collection of income-tax, the

payer should deduct tax 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-

31 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-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 connection or nexus

between the person who is subject to the tax and the country imposing the

32 tax, its validity would not be open to challenge on the ground that it is extra-

territorial in operation. In that case, the question which arose for

determination before the Federal Court was whether Section 42(1) of the

1922 Act, which brought within the scope of the charging section "interest"

earned out of money lent outside British India, but brought into British India

as ultra vires the Indian Legislature on the ground that it had extra-territorial

operation. It may be stated that Section 9 of the 1961 Act gathers in one place

various provisions (which stood scattered in the 1922 Act) under which

income actually accruing to an assessee abroad is deemed to accrue in India.

Section 42(1) of the 1922 Act is similar to Section 9(1)(i) of the 1961 Act. It

was held by the Federal Court that Section 42(1) brings within the ambit of

the charging section (Section 4 of the 1922 Act) income accruing or arising,

directly or indirectly, under the four categories of income, viz., from business

connection or property or asset/ source of income in India or through transfer

of capital asset in India or through moneys lent. It was held that since the

money lent was brought by the assessee into British India, the transaction fell

under one of the categories of income in Section 42(1), consequently the

income therefrom was deemed to accrue or arise in British India. It was held

that once an income came within one of the categories of income in Section

42(1), the income arising out of the transaction came under Section 42(1) as

there existed a territorial connection between the person receiving income

33 under the particular head and India. It may be mentioned that Section 42(1) of

the 1922 Act is similar to Section 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 operation of the Income-

tax Act, 1961, it may be noted that the 1961 Act has extra-territorial

34 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 294 this Court has held that the charging

section and the computation provisions together constitute an integrated

Code. When there is a case to which computation provisions cannot apply at

all, it is evident that such a case was not intended to fall within the charging

section. We may add that, the 1961 Act is an integrated code and, as stated

hereinabove, Section 9(1) integrates the charging section, the computation

provisions as well as the machinery provisions. (see Section 9(1)(i) read with

Sections 160, 161, 162 and 163)

29. In the present case, it has been vehemently urged that TDS

provisions being machinery provisions are independent of the charging

provisions whereas as held by this Court in the case of B.C. Srinivasa Setty

(supra), the 1961 Act is an integrated Code. To answer the contention herein

35 we need to examine briefly the scheme of the 1961 Act. Section 4 is the

charging section. Under section 4(1), total income for the previous year is

chargeable to tax. Section 4(2) inter alia provides that in respect of income

chargeable under sub-section(1), income-tax shall be deducted at source

whether it is so deductible under any provision of the 1961 Act which inter

alia brings in the TDS provisions contained in Chapter XVII-B. In fact, if a

particular income falls outside Section 4(1) then TDS provisions cannot come

in. Under Section 5, all residents and non-residents are chargeable in respect

of income which accrues or is deemed to accrue in India or is received in

India. Non-residents who are not assessable in respect of income accruing

and received abroad are rendered chargeable under Section 5(2)(b) in respect

of income deemed by Section 9 to accrue in India. Section 9 deems certain

categories/heads of income to accrue in India has no application in cases

where income 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

36 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 163 are

machinery sections. They do not affect the incidence of taxation under

37 Sections 4 and 5 which are the charging sections. Sections 160 and 161

provide a machinery for collection of a charge which is imposed in general

terms elsewhere and yet Sections 160 and 161 are the sections which like

Section 201(1) imposes a vicarious liability on an agent to be assessed in

respect of the income of the principal. The liability is imposed under Sections

160 and 161 in respect of the income of non-resident principal and it is only

in respect of the income falling within Section 9(1) and not any other income.

Therefore, one has to read Section 9(1) with Section 160 and Section 161

which are machinery sections (See The Law and Practice of Income Tax by

Kanga & Palkhivala, eighth edition., at pp. 1268 and 1269).

(b) Similarly, Section 40(a)(iii), quoted above, which finds place in

Chapter IV (computation of business income) inter alia states that any

payment which is chargeable under the head "Salaries", if it is payable

outside India or to a non-resident and if the tax thereon is not deducted from

such payment under Chapter XVII-B then notwithstanding the entitlement of

the assessee to claim deduction, the same will be disallowed for such non-

deduction of tax at source.

30. The above examples show that the 1961 Act is an integrated code in

which one cannot segregate the computation machinery from the collection

and recovery machinery.

(ii) On the Scope of Section 192(1):

38

31. On behalf of the tax-deductor-assessee the basic contention before

us was that Section 192(1) was not applicable as the Home Salary was paid

by the foreign company outside India dehors the contract between the

respondent herein and the expatriate(s). That, the contract under which the

home 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

39 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 an

integrated code. At this stage two aspects need to be highlighted. Firstly, in

Section 192(1), tax at source has to be deducted on the amount payable. This

is where the tax-deductor-assessee has to estimate the income of the

assessee-employee under the head "Salaries". This word "payable" also finds

place in Section 40(a)(iii). Secondly, one has to note the effect of the

Explanation to Section 9(1)(ii). Prior to the insertion of the Explanation, the

Gujarat High Court had held in the case of PGNATALE (supra) that the

words "earned in India" in Section 9(1)(ii) must be interpreted as "arising or

accruing in India" and not as "from services rendered in India". Therefore,

according to the Gujarat High Court, if the liability to pay arose outside India

and the amount became payable outside India, Section 9(1)(ii) was not

40 invokable. To offset the effect of the judgment of the Gujarat High Court, an

Explanation was inserted by which the expression "earned in India" stood

equated to "services rendered in India". Thus, according to Kanga and

Palkhivala on the The Law and Practice of Income Tax, Section 9(1)(ii) inter

alia provides for an artificial place of accrual for income taxable under the

head "Salaries" (see seventh edition at p. 207). Section 9(1)(ii) thus enacts

that income chargeable under the head "Salaries" under Section 15 shall be

deemed to accrue or arise in India if it is earned in India, i.e., if the services

under the agreement of employment are or were rendered in India, the place

of receipt or actual accrual of the salary being immaterial. Thus, Section 192

(1) has to be read with Section 9(1)(ii). This is one more illustration to show

that the 1961 Act is an integrated code. In fact, if Section 192(1) is to be

segregated from Section 9(1)(ii) 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

41 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 for services rendered in India. In such a case the

tax-deductor-assessee was statutorily obliged to deduct tax under Section 192

(1) of the 1961 Act.

(iii) On the Scope of Section 201(1) and Section 201(1A):

42

34. A perusal of Section 201(1) and Section 201(1A) shows that both

these provisions are without prejudice to each other. It means that the

provisions of both the sub-sections are to be considered independently

without affecting the rights mentioned in either of the sub-sections. Further,

interest under Section 201(1A) is compensatory measure for withholding the

tax which ought to have gone to the exchequer. The levy of interest is

mandatory and the absence of liability for tax will not dilute the default. The

liability of deducting tax at source is in the nature of a vicarious liability,

which pre-supposes existence of primary liability. The said liability is a

vicarious liability and the principal liability is of the person who is taxable. A

bare reading of Section 201(1) shows that interest under Section 201(1A)

read with Section 201(1) can only be levied when a person is declared as an

assessee-in-default. For computation of interest under Section 201(1A), there

are three elements. One is the quantum on which interest has to be levied.

Second is the rate at which interest has to be charged. Third is the period for

which interest has to be charged. The rate of interest is provided in the 1961

Act. The quantum on which interest has to be paid is indicated by Section 201

(1A) itself. Sub-section (1A) specifies "on the amount of such tax" which is

mentioned in sub-section (1) wherein, it is the amount of tax in respect of

which the assessee has been declared in default. The object underlying

Section 201(1) is to recover the tax. In the case of short deduction, the object

43 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

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

44 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

before us, we find that non-deduction of tax at source took place on account

of controversial addition. The concept of aggregation or consolidation of the

entire income chargeable under the head "Salaries" being exigible to

deduction of tax at source under Section 192 was a nascent issue. It has not

be considered by this Court before. Further, in most of these cases, the tax-

deductor-assessee has not claimed deduction under Section 40(a)(iii) in

computation of its business income. This is one more reason for not imposing

penalty under Section 271C because by not claiming deduction under Section

40(a)(iii), in some cases, higher corporate tax has been paid to the extent of

Rs. 906.52 lacs (see Civil Appeal No. 1778/06 entitled CIT v. The Bank of

Tokyo-Mitsubishi Ltd.). In some of the cases, it is undisputed that each of the

expatriate employees have paid directly the taxes due on the foreign salary by

way of advance tax/self-assessment tax. The tax-deductor-assessee was under

a genuine and bona fide belief that it was not under any obligation to deduct

tax at source from the home salary paid by the foreign company/HO and,

consequently, we are of the view that in none of the 104 cases penalty was

leviable under Section 271C as the respondent in each case has discharged its

45 burden of showing reasonable cause for failure to deduct tax at source.

VI. Directions-cum-Conclusion:

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

46 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.

47 .............................J. (S. H. Kapadia)

.............................J. (Aftab Alam) New Delhi;

March 25, 2009.

ITEM NO. 1-A ( For COURT No.5 SECTION IIIA Judgment )

SUPREME COURT OF INDIA RECORD OF PROCEEDINGS

Civil Appeal No. 5114 of 2007

Commr. of Income Tax, New Delhi .. Appellant(s) Versus M/s Eli Lilly & Company (India) P. Ltd. .. Respondent(s)

WITH

48 Civil Appeal No. 5152 of 2005 Civil Appeal No. 1775 of 2006 Civil Appeal No. 1782 of 2006 Civil Appeal No. 1776 of 2006 Civil Appeal No. 1778 of 2006 Civil Appeal No. 1780 of 2006 Civil Appeal No. 1786 of 2006 Civil Appeal No. 1783 of 2006 Civil Appeal No. 1785 of 2006 Civil Appeal No. 1787 of 2006 Civil Appeal No. 1789 of 2006 Civil Appeal No. 1791 of 2006 Civil Appeal No. 1792 of 2006 Civil Appeal No. 1793 of 2006 Civil Appeal No. 1794 of 2006 Civil Appeal No. 1795 of 2006 Civil Appeal No. 1796 of 2006 Civil Appeal No. 1784 of 2006 Civil Appeal No. 1920 of 2006 Civil Appeal No. 2187 of 2006 Civil Appeal No. 2211 of 2006 Civil Appeal No. 2210 of 2006 Civil Appeal No. 2480 of 2006 Civil Appeal No. 5263 of 2006 Civil Appeal No. 5646 of 2006 Civil Appeal No. 107 of 2007 Civil Appeal No. 347 of 2007 Civil Appeal No. 161 of 2007 Civil Appeal No. 159 of 2007 Civil Appeal No. 156 of 2007 Civil Appeal No. 352 of 2007 Civil Appeal No. 428 of 2007 Civil Appeal No. 434 of 2007 Civil Appeal No. 342 of 2007 Civil Appeal No. 344 of 2007 Civil Appeal No. 343 of 2007 Civil Appeal No. 345 of 2007 Civil Appeal No. 346 of 2007 Civil Appeal No. 349 of 2007 Civil Appeal No. 816 of 2007 Civil Appeal No. 1346 of 2007 Civil Appeal No. 1357 of 2007 Civil Appeal No. 1345 of 2007 Civil Appeal No. 1355 of 2007 Civil Appeal No. 1352 of 2007 Civil Appeal No. 1351 of 2007 Civil Appeal No. 1354 of 2007 Civil Appeal No. 1346 of 2007 Civil Appeal No. 1343 of 2007 Civil Appeal No. 2295 of 2007 Civil Appeal No. 2293 of 2007

49 Civil Appeal No. 1634 of 2007 Civil Appeal No. 1956 of 2007 Civil Appeal No. 1948 of 2007 Civil Appeal No. 1943 of 2007 Civil Appeal No. 1939 of 2007 Civil Appeal No. 1961 of 2007 Civil Appeal No. 2121 of 2007 Civil Appeal No. 2294 of 2007 Civil Appeal No. 2292 of 2007 Civil Appeal No. 4173 of 2007 Civil Appeal No. 4516 of 2007 Civil Appeal No. 4517 of 2007 Civil Appeal No. 3212 of 2007 Civil Appeal No. 3124 of 2007 Civil Appeal No. 3126 of 2007 Civil Appeal Nos. 5110-5111 of 2007 Civil Appeal No. 264 of 2007 Civil Appeal No. 293 of 2008 Civil Appeal No. 292 of 2008 Civil Appeal No. 4477 of 2007 Civil Appeal No. 4082 of 2007 Civil Appeal No. 1037 of 2008 Civil Appeal No. 3523 of 2007 Civil Appeal No. 1462 of 2008 Civil Appeal No. 5288 of 2007 Civil Appeal No. 5295 of 2007 Civil Appeal No. 5986 of 2007 Civil Appeal No. 5742 of 2007 Civil Appeal No. 5749 of 2007 Civil Appeal No. 3587 of 2008 Civil Appeal No. 3616 of 2007 Civil Appeal No. 1769 of 2006

Civil Appeal No.1890 of 2009 @ SLP(C) No. 21443 of 2006 Civil Appeal No.1891 of 2009 @ SLP(C) No. 3768 of 2007 Civil Appeal No.1892 of 2009 @ SLP(C) No. 3769 of 2007 Civil Appeal No.1893 of 2009 @ SLP(C) No. 3770 of 2007 Civil Appeal No.1894 of 2009 @ SLP(C) No. 3771 of 2007 Civil Appeal No.1895 of 2009 @ SLP(C) No. 3946 of 2007 Civil Appeal No.1896 of 2009 @ SLP(C) No. 3947 of 2007 Civil Appeal No.1897 of 2009 @ SLP(C) No. 5536 of 2007 Civil Appeal No.1898 of 2009 @ SLP(C) No. 5646 of 2007 Civil Appeal No.1899 of 2009 @ SLP(C) No. 7021 of 2007 Civil Appeal No.1900 of 2009 @ SLP(C) No. 9641 of 2007 Civil Appeal No.1901 of 2009 @ SLP(C) No. 9637 of 2007 Civil Appeal No.1902 of 2009 @ SLP(C) No. 1953 of 2009 Civil Appeal No.1903 of 2009 @ SLP(C) No. 2621 of 2009 Civil Appeal No.1906 of 2009 @ SLP(C) No. 8879 of 2008 Civil Appeal No.1907 of 2009 @ SLP(C) No. 28553 of 2008 Civil Appeal No.1904 of 2009 @ SLP(C) No.7307 of 2009 (CC 17118) Civil Appeal No.1905 of 2009 @ SLP(C) No.7308 of 2009 (CC 17308) Civil Appeal No.1908 of 2009 @ SLP(C) No.7310 of 2009 (CC 1584)

50 DATE : 25/03/2009 These matters were called on for pronouncement of judgment today.

For Appellant(s) Ms. Arti Gupta, Adv.

Ms. Vismai Rao, Adv.

Mr. B.V. Balram Das, Adv.

For Respondent(s)/ Mr. Ajay Vohra, Adv.

appearing parties: Ms. Kavita Jha, Adv.

Mr. Sandeep S. Karhail, Adv.

Ms. Mahua Kalra, Adv.

Mr. R.S. Suri, Adv.

Mr. Jagjit Singh Chhabra, Adv.

Mr. Kamal Mohan Gupta, Adv.

Mr. P.V. Yogeswaran, Adv.

Mr. Bhargava V. Desai, Adv.

Mr. Vikas Mehta, Adv.

Mr. N. Ganpathy, Adv.

Mr. Dhruv Mehta, Adv. for M/s K.L. Mehta & Co.,Advs.

Mr. Amboj Kumar Sinha, Adv.

Mr. S. Prasad, Adv.

Mr. Rajinder Mathur, Adv.

Mr. P.N. Gupta, Adv.

Mr. Chandra Prakash Pandey, Adv.

Mr. Anuvrat Sharma, Adv.

Mr. O.P. Khaitan, Adv. for M/s Khaitan & Co.,Advs.

---

Hon'ble Mr. Justice S.H. Kapadia pronounced the judgment of the Bench

51 comprising his Lordship and Hon'ble Mr. Justice Aftab Alam.

Delay condoned.

Leave granted.

The appeals filed by the Department are partly allowed in terms of the

signed judgment which is placed on the file. There shall be no order as to costs.

[ S. Thapar ] [ Madhu Saxena ] PS to Registrar Court Master

[ Signed reportable judgment is placed on the file ]

52