Facts of the Case

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

These employees were receiving salary from the respondent company in India and, in addition, were also receiving salary from Eli Lilly outside India. The respondent deducted TDS from the salary paid by it in India and deposited the same with the Income Tax Department.

There was no dispute that the entire salary of these employees was taxable in India. The employees had already been assessed to tax and had paid tax on their global salaries. Since advance tax had not been deposited by them, they had also paid interest in accordance with the provisions of the Income Tax Act.

The Revenue contended that the respondent company ought to have deducted TDS not only on the salary paid in India but also on the salary received by the expatriates from the foreign entity.

Issues Involved

  1. Whether the respondent company was required under Section 192 to deduct TDS on salary paid by the foreign collaborating company outside India to expatriate employees working in India.
  2. Whether failure to deduct TDS on such foreign salary components justified recovery of tax or interest from the respondent company.
  3. Whether any substantial question of law arose for consideration in the appeals.

Petitioner’s Arguments

The Revenue argued that three of the expatriates were Managing Directors and the fourth was the General Manager of the respondent company.

According to the Revenue, it was not possible to assume that the respondent company was unaware of the salaries received by these executives from the foreign collaborating company.

It was therefore submitted that the respondent company was under a legal obligation to deduct TDS not only on the salaries paid by it in India but also on the salary receivable by the expatriate employees from Eli Lilly Netherlands B.V.

The Revenue further argued that even if tax had already been paid by the employees, interest could still be recovered from the respondent company.

Respondent’s Arguments

The respondent company maintained that it had duly deducted TDS on the salary actually paid by it in India and deposited the tax with the Department.

It was contended that Section 192 contemplates deduction of tax at source at the time of payment and that the company could not be held liable for salary payments made by a separate foreign entity outside India.

The respondent also relied upon judicial precedents holding that TDS liability arises only when payment is made by the person responsible for making such payment.

Court Order and Findings

The Delhi High Court dismissed the appeals filed by the Revenue.

The Court relied upon the decision in Commissioner of Income Tax vs Tej Quebecor Printing Ltd. 281 ITR 170 and observed that a person making payment can deduct tax at source only at the time of making such payment. Both accrual and actual payment must exist before deduction at source can be made under Section 192.

The Court held that while a portion of salary may have accrued to the expatriate employees outside India, the respondent company had not actually made those payments. Therefore, the obligation to deduct tax at source in respect of those payments could not be imposed upon the respondent company.

The Court also referred to CIT vs Sencma SA France 156 Taxman 403 Delhi, where penalty proceedings in a similar factual situation had been deleted. The Court noted that considerable confusion prevailed regarding the issue and that imposition of penalty was not justified.

The Court rejected the Revenue’s argument that interest could be recovered from the respondent company merely because tax had already been paid by the employees. The Court held that such a contention presupposed a legal default by the respondent company, which had not been established.

Accordingly, the Court concluded that no substantial question of law arose for consideration and dismissed all the appeals without any order as to costs.

Important Clarification

The Court clarified that the obligation under Section 192 is linked to actual payment of salary by the employer responsible for making such payment.

Where salary is paid by a foreign entity and not by the Indian employer, the Indian employer cannot automatically be fastened with TDS liability in respect of such foreign payments merely because the employee is working in India.

The Court further clarified that the observations made in the order were confined to the peculiar facts and circumstances of the case and should not be treated as a binding precedent for other situations.

Sections Involved

Section 192 of the Income Tax Act, 1961

Link to download the order- https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:24863-DB/VJS08112006ITA10332006_154303.pdf

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