IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No. 5114/2007

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,

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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).   

J U D G M E N T

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

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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.

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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

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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”

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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

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“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

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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.

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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).

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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,

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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   

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“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 Judgment )

           COURT No.5     SECTION  IIIA

              S U P R E M E   C O U R T   O F   I N D I A                            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 ]     PS to Registrar

 [ Madhu Saxena ]    Court Master  

[ Signed reportable judgment is placed on the file ]  

52