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; 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.
SUPREME COURT OF INDIA
CIT
v.
Eli Lilly & Company (I) Pvt. Ltd.
Civil Appeal No. 5114/2007 with
CA Nos. 5152/2005,1775/2006 & 1782/2006 etc.
March 25, 2009
RELEVANT EXTRACTS:
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 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 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- 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 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 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 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 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 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 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):
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 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 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 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):
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 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 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 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 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.
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