Facts of the Case

The respondent company, Eli Lilly and Co India Private Limited, was a joint venture Indian company formed through collaboration between Eli Lilly Netherlands B.V. and Ranbaxy Laboratories Limited. The company engaged the services of four expatriate employees in India.

These employees received salary from the respondent company in India and additional salary from Eli Lilly Netherlands B.V. outside India. The respondent deducted Tax Deducted at Source (TDS) on the salary paid by it in India and deposited the same with the Income Tax Department.

The expatriate employees were taxable in India on their entire global salary income. They were assessed to tax and had paid tax on their global salary, including the amounts received abroad. Interest relating to advance tax liability had also been paid by the employees.

The Revenue alleged that the respondent company was under an obligation to deduct TDS not only on the salary paid in India but also on the salary paid abroad by the foreign collaborator to the expatriate employees.

Issues Involved

  1. Whether the respondent company was liable under Section 192 to deduct TDS on salary paid outside India by the foreign collaborator to expatriate employees working in India.
  2. Whether failure to deduct TDS on such foreign salary payments attracted liability under Sections 201 and 201(1A) of the Income Tax Act, 1961.
  3. Whether interest could be recovered from the respondent company when the employees had already paid tax on their global income.

Petitioner’s Arguments

The Revenue contended that three of the expatriate employees were Managing Directors and the fourth was the General Manager of the respondent company. Therefore, the respondent company could not claim ignorance regarding the salaries received by these executives abroad.

The Revenue argued that the respondent company was duty-bound to deduct TDS not only on the salaries paid by it in India but also on the salaries received by the employees from Eli Lilly Netherlands B.V. outside India.

It was further submitted that even if tax had already been paid by the employees on their foreign income, interest could still be recovered from the respondent company for failure to deduct tax at source.

Respondent’s Arguments

The respondent company maintained that it had duly deducted TDS on the salary paid by it in India and had complied with its statutory obligations.

It was contended that the foreign salary payments were made by Eli Lilly Netherlands B.V. outside India and were not payments made by the respondent company.

The respondent relied upon judicial precedents holding that deduction under Section 192 arises only when the employer actually makes the salary payment. Since the foreign salary payments were not made by the respondent company, no obligation to deduct TDS arose in respect of those payments.

The respondent also argued that the employees had already paid tax on their global income and therefore no further demand could be imposed on the company.

Court Findings and Order

The Delhi High Court relied upon its earlier decision in Commissioner of Income-Tax v. Tej Quebecor Printing Ltd. [2006] 281 ITR 170, wherein it was held that tax deduction at source is required only when payment is actually made and not merely because income has accrued.

The Court observed that while salary may have accrued to the expatriate employees outside India, the actual payment of the foreign salary had not been made by the respondent company. Consequently, the essential condition for deduction of tax at source under Section 192 was absent.

The Court also referred to CIT v. Sencma SA, France [2006] 156 Taxman 403 (Delhi), where penalty proceedings were deleted in a similar factual situation involving expatriate employees receiving salary both in India and abroad.

The Court rejected the Revenue’s contention regarding recovery of interest from the respondent company. It held that such an argument presupposed a legal default by the respondent company in failing to deduct tax at source. Since no such default existed, there was no justification for recovering interest.

The Court concluded that no substantial question of law arose for consideration.

Final Order

The appeals filed by the Revenue were dismissed.

No order as to costs was passed.

The Court clarified that the observations made in the order were confined to the facts of the present cases and should not be treated as a precedent.

Important Clarification

The Court emphasized that TDS liability under Section 192 arises only when the person responsible for payment actually makes the salary payment. Mere accrual of salary income without actual payment by the employer does not trigger TDS obligations under Section 192.

The Court further observed that failure to deduct tax at source should not automatically result in penalty proceedings and that, depending upon the circumstances, payment of interest may be an adequate remedy.

Sections Involved

  • Section 192 – Deduction of tax at source from salary
  • Section 201 – Consequences of failure to deduct or pay tax
  • Section 201(1A) – Interest for failure to deduct or pay tax
  • Provisions relating to taxation of global salary income of expatriate employees

Link to download the order-https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:24872-DB/VJS08112006ITA7112006_154559.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.