# [2009] 5 S.C.R. 20

- **Citation:** [2009] 5 S.C.R. 20
- **Court:** Supreme Court of India
- **Decided:** 2009-03-25
- **Case number:** Civil Appeal No. 5114 of 2007
- **Bench:** S.H. Kapadia, Aftab Alam
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/2009-5-s-c-r-20-25825
- **Pages:** 47

## Headnote

Income Tax Act, 1961:
c
Chapter XV/1-B - Ss.192(1), 9(1)(ii) - TDS provisions
relating to payment of income chargeable under the head
'Salaries' - In the nature of machinery provisions to enable
collection and recove1y of tax - Held: Forms an integrated
code with the charging and computation provisions which
D detem1ines the assessabilityltaxability of 'Salaries' in the
~
hands '>f the employoe-assessee.
S1".~tions 201(1) and 201 (1A)- Levy of interest- Scope
of - Uiscussed - Directions issued to the AO and
E Adjudicating Authority.
Sections 271C rlw s.2738 - Liability to levy penalty can
be fastened only on the persons who do not have good and
sufficient reason for not deducting the tax - On the facts of
the case, penalty pmceedings u/s 271C quashed.
F
The main ques.tion which arose for consideration in
the appeals filed by the Revenue was whether TDS
provisions in Chapter XVll-B of the Income Tax Act, 1961,
which are in the nature of machinery provisions to enable
G collection and rec1:>Very of taxes, are independent of the
charging provisions which determines the assessability
of income chargeable under the head 'Salaries' in the
.,...
hands of the recepient.
H
20
•
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
21
LILLY & COMPANY (INDIA) PVT. LTD.
Partly allowing the appeals, the Court
A
HELD: 1.1. 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
8
apply to gross sums, the whole of which may not be
income or profits in the hands of the recipient, such as
payment to contrac~ors 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 C
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. [Para 21) (54-B-D]
D
1.2. The general concept as to the scope of incometax 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
E
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. [Para
24) (55-A-B]
CIT v. S.G. PGNATALE 124 ITR 391(Gujarat);
Transmission Corporation of A.P. Ltd. and Anr. v. CIT [1999)
239 ITR 587 and A.H. Wadia v. CIT (1949) 17 ITR 63,
referred to.
'The Law and Practice of Income Tax' by Kanga and
-t
Palkhivala, seventh edition, p. 10 - referred to.
2. If the payments of Home Salary abroad by the
F
G
H
22
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A 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 r,ecipient in India as salary earned
in India in terms of Section 9(1)(ii) (which is one of the
B 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
C 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
0 typical example of a combination of a machinery
provision which also provides for chargeability. [Para 26)
[56-B-F]
3. The 1961 Act has extra-territorial operation in
respect of the subject-matters and the s

## Text

_Characters 0–39,985 of 90,249. This is a partial read: ask again with offset=39985 for what follows._

(2009) 5 S.C.R. 20
A
COMMISSIONER OF INCOME-TAX, NEW DELHI
II.
M/S EU· LILLY & COMPANY (INDIA) PVT. LTD.
(Civil Appeal No. 5114 of 2007)
B
MARCH 25, 2009
[S.H. KAPADIA AND AFTAB ALAM, JJ.]
Income Tax Act, 1961:
c
Chapter XV/1-B - Ss.192(1), 9(1)(ii) - TDS provisions
relating to payment of income chargeable under the head
'Salaries' - In the nature of machinery provisions to enable
collection and recove1y of tax - Held: Forms an integrated
code with the charging and computation provisions which
D detem1ines the assessabilityltaxability of 'Salaries' in the
~
hands '>f the employoe-assessee.
S1".~tions 201(1) and 201 (1A)- Levy of interest- Scope
of - Uiscussed - Directions issued to the AO and
E Adjudicating Authority.
Sections 271C rlw s.2738 - Liability to levy penalty can
be fastened only on the persons who do not have good and
sufficient reason for not deducting the tax - On the facts of
the case, penalty pmceedings u/s 271C quashed.
F
The main ques.tion which arose for consideration in
the appeals filed by the Revenue was whether TDS
provisions in Chapter XVll-B of the Income Tax Act, 1961,
which are in the nature of machinery provisions to enable
G collection and rec1:>Very of taxes, are independent of the
charging provisions which determines the assessability
of income chargeable under the head 'Salaries' in the
.,...
hands of the recepient.
H
20
•
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
21
LILLY & COMPANY (INDIA) PVT. LTD.
Partly allowing the appeals, the Court
A
HELD: 1.1. 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
8
apply to gross sums, the whole of which may not be
income or profits in the hands of the recipient, such as
payment to contrac~ors 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 C
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. [Para 21) (54-B-D]
D
1.2. The general concept as to the scope of incometax 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
E
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. [Para
24) (55-A-B]
CIT v. S.G. PGNATALE 124 ITR 391(Gujarat);
Transmission Corporation of A.P. Ltd. and Anr. v. CIT [1999)
239 ITR 587 and A.H. Wadia v. CIT (1949) 17 ITR 63,
referred to.
'The Law and Practice of Income Tax' by Kanga and
-t
Palkhivala, seventh edition, p. 10 - referred to.
2. If the payments of Home Salary abroad by the
F
G
H
22
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A 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 r,ecipient in India as salary earned
in India in terms of Section 9(1)(ii) (which is one of the
B 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
C 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
0 typical example of a combination of a machinery
provision which also provides for chargeability. [Para 26)
[56-B-F]
3. The 1961 Act has extra-territorial operation in
respect of the subject-matters and the subjects which is
E permissible under Article 245 of the Constitution and the
provisions are enforceable within the Area where the
1961 Act extends thrc1ugh the machinery provided under
it. [Para 27) [56-F-G]
F
4. 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
G of taxation by deeming income to arise in India in certain
circumstances. UndEir Section 9(1), income is deemed to
accrue in India if it ac:crues directly or indirectly under five
circumstances mentioned therein. [Para 29) [57-G; 58-AH BJ
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
23
LILLY & COMPANY (INDIA) PVT. LTD.
CIT v. B.C. Srinivasa Setty (1981] 128.ITR 294, referred
A
to.
5.1. 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
8
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 C
161 in respect of the income of non-re'sident 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. (Para 29] (59-A-D]
D
5.2. Similarly, Section 40(a)(iii), 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 nonE
resident and if the tax thereon is not deducted from such
payment under Chapter XVll-8 then notwithstanding the
entitlement of the 'assessee to claim deduction, the same
will be disallowed for such non-deduction of tax at
source. Thus, the 1961 Act is an integrated code in which
F
one cannot segregate the computation machinery from
the collection and recovery machinery. [Paras 29 and 30]
(59-E-G]
'The Law and Practice of Income Tax' by Kanga &
Palkhivala, eighth edition., pp. 1268 and 1269, referred to.
G
6.1. 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
H
24
SUPREME COURT REPORTS
(2009] 5 S.C.R.
A financial year. It is true 1that the word "aggregate" does
not precede the word "income" in Section 192(1 ).
However, in Section 19:2(1), the words used are "any
income chargeable under the head "salaries" shall at the
time of payment, deduct income-tax on the amount
B 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 "salariE!S". The words used in Section
192(1) are "any income chargeable under the head
'Salaries"'. This aspect is very important. Under the 1961
c Act, 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
0 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
E word "payable" also find:s place in Section 40(a)(iii).
Secondly, one has to note the effect of the Explanation
to Section 9(1)(ii). [Para 32) [60-D-G; 61-A-B]
6 .. 2. Section 9(1 )(ii) thus enacts that income
F chargeable under the head "Salaries" under Section 15
shall be deemed to accrue cir arise in India if it is earned
in India, i.e., if the servict~s under the agreement of
employment are or were rendered in India, the place of
receipt or actual accrual of the salary being immaterial.
G 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(1Hii) or from Section 40(a)(iii)
then the very purpose of shifting the "accrual test" to the
H "earning test" by reason o'f insertion of Explanation,
A
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
25
}
LILLY & COMPANY (INDIA) PVT. LTD.
would stand defeated. Section 192(1) is the only section A
-
in Chapter XVll-8, 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 B
chargeability and computation goes hand in hand. Thus,
Section 192(1), which is a stand-alone section in Chapter
XVll-8, has to be read with Section 9(1)(ii). [Para 32] (61E-H; 62-A]
7. It cannot be stated as a broad proposition ttiat the c
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.
J
Secondly, whether the Home Salary payment made by the D
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 E
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 F
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 G
to deduct tax under Section 192 (1) of the 1961 Act. [Paril
•
33) (62·8-F]
8. A perusal of Section 201(1) and Section 201(1A)
shows that both these provisions are without prejudice
H
to each other. It means that the provisions of both the
26
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A sub-sections are to be considered independently without
affecting the right:s mentioned in either of the subsections. 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
B 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 prim;uy liability. The said liability is a
vicarious liability and the principal liability is of the person
c 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
D quantum on which interest has to be levied. Second is the
rate at which intere~st 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 tc1 be paid is indicated by Section 201
(1A) itself. Sub-section (1A) specifies "on the amount of
E 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
F the period of default is concerned, the period starts from
the date of deductibmty till the date of actual payment of
tax. Therefore, the levy of interest has to be restricted for
the above stated periiod only. It may be clarified that the
date of payment by the concerned employee can be
G treated as the date of actual payment. [Para 34] [62-F-H;
63-A-E]
9. The liability to levy of penalty can be fastened only
on the person who do not have good and sufficient
H reason for not deducting tax at source. Only those
-
COMMISSIONER OF INCOME-TAX, NEW DELHI v. EU
27
LILLY & ·COMPANY (INDIA) PVT. LTD.
persons will be liable to penalty who do not have good A
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 this
Court, it is found that non-deduction of tax at source took
place on account of controversial addition. The concept B
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- c
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 D
paid to the extent of Rs. 906.52 lacs. In some of the cases,
it is undisputed that each of the expe1triate employees
have paid directly the taxes due on the foreign salary by
way of advance tax/self-assessment tax. The taxdeductor-assessee was under a genuine and bona fide
belief that it was not under any obligation to deduct tax E
at source from the home salary paid by the foreign
company/HO and, consequently, in none of the 104 cases
penalty was leviable under Section 271 C as the
respondent in each case has discharged its burden of
showing reasonable cause for failure to deduct tax at F
source. [Para 35] [64-B-G]
10.1. The TDS provisions in Chapter XVll-B relating
to payment of income chargeable under the head
"Salaries", which are in the nature of machinery G
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 H
28
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A
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
B
in dispute. Therefor~•. 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
c foreign company and the total remuneration stood paid
only on account of services rendered in India during the
period in question. The AO is directed to examine each
case to ascertain wh1!ther the employee-assessee
(recipient) has paid th11 tax due on the Home Salary/
0
special allowance(s) rec1aived from the foreign company.
In case taxes due on H1:>me 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
E shortfall in the payment of tax. [Para 36] [65-A-F]
10.2. Similarly, in each of the 104 appeals, the AO
shall examine and find out whether interest has been
paid/recovered for the pe1riod between the date on which
tax was deductible till the date on which the tax was
F
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). [Para
G
H
. 37) [65-F-H; 66-A]
10.3. However, no penalty proceedings under
Section 271C shall be taken in any of these cases as the
issue involved was a nascent issue. Accordingly the
·•
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
29
LILLY & COMPANY (INDIA) PVT. LTD.
penalty proceedings under Section 271C are quashed. A
[Para 38] [65-A-B]
Case Law Reference:
124 ITR 391(Gujarat)
referred to
(1999] 239 ITR 587
referred to
(1949) 17 ITR 63
referred to
[1981] 128 ITR 294
referred to
Para 21
Para 21
Para 25
Para 28
B
CIVIL APPELLATE JURISDICTION: Civil Appeal No.5114 C
of 2007.
From the Judgment and Order dated 8.11.2006 of the High
Court of Delhi at New Delhi in IT A No. 1034 of 2006.
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,
D
E
C.A.No.1920/2006, C.A.No.2187/2006, C.A.No.2211/2006,
F
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,
G
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.1346/2007, C.A.No.1357/2007,
H
30
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A
C.A.No.1345/2007, C.ANo.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,
B 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 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.l\lo.1037/2008, C.A.No.3523/2007,
D C.A.No.1462/2008, C.A.l\lo.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,
E C.A.No. 1890/2009
C.A. No. 1891/2009
C.A. No. 1892/2009
C.A. No. 1893/2009
F
C.A. No. 1894/2009
C.A. No. 1895/2009
C.A. No. 1896/2009
C.A.No. 1897/2009
G C.A. No. 1898/2009
C.A. No. 1899/2009
C.A. No. 1900/2009
C.A. No. 1901/2009
H
..
{
•
'
'
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~
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I
,,
-•{
'
~·
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
31
LILLY & COMPANY (INDIA) PVT. LTD.
C.A. No. 1902/2009
A
C.A. No. 1903/2009
C.A. No 1906/2009
C.A. No. 1907/2009
C.A. No. 1904/2009
C.A. No. 1905/2009
C.A. No. 1908/2009
Arti Gupta, Vismai Rao and B.V. Bairam Das for the
Appellant.
Ajay Vohra, Kavita Jha, Sandeep S. Karhail, Mahua Kalra,
R.S. Suri, Jagjit Singh Chhabra, Kamal Mohan Gupta, P.V.
Yogeswaran, Bhargava V. Desai, Vikas Mehta, N. Ganpathy,
Dhruv Mehta, K.L. Mehta & Co. Amboj Kumar Sinha, S.
Prasad, Rajinder Mathur, P.N. Gupta, Chandra Prakash
Pandey, Anuvrat Sharma, O.P. Khaitan and M/s. Khaitan & Co.,
for the Respondent.
The Judgment of the Court was delivered by
S.H. KAPADIA, J. 1. Delay condoned.
2. Leave granted.
3. In this batch of civil appeals, the question which arises
for determination is - whether TDS provisions in Chapter XVIIB, 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 taxdeductor-assessee(s) has not deducted tax at source on the
Home Salary/special allowance(s) (education allowance or
retention) payments made by the Foreign Company/HO to its
employees (expatriates to India) outside India in foreign
currency.
B
c
D
E
.F
G
H
..
>
32
SUPREME COURT REPORTS
[2009] 5 S.C.R.
-
?
!
A
I. Facts in Civil Appeal No. 5114107:
.~
[CIT v. Mis Eli Lilly & Co. (I) Pvt. Ltd.]
4. Assessee was engaged in manufacturing and selling
i
pharmaceutical products during the financial years 1992-93 to
B 1999-00. In the course of survey under Section 133A of the
'
Income-tax Act, 1961 ("1961 Acf' 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
c 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-deductorassessee. The post-survey operations revealed that no work
stood performed for Mis Eli Lilly Inc., Netherlands ("Foreign
D 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 expcitriates was taxable in India and subject to
Section 192(1) of the 1961 Act. Consequently, the taxE 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.
F
5. In reply, the tax-deductor-assessee submitted that the
four expatriates were seconded by the Foreign Company to the
Joint Venture compciny 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
r,
foreign currency from the said Foreign Company. It was further
submitted that the joint venture company deducted tax at source
under Section 19~!(1) in respect of the salary paid to the
expatriates in India and that no tax stood deducted in respect
of the Home Sala1ry paid by the Foreign Company to the
expatriates outside India, dehors the contract of employment
H
'
~,
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
33
·-
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
in India.
A
6. The AO held that the respondent herein, viz., the taxdeductor-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).
B
•
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 c
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 the 1961 Act. Hence, the Department has come to
this Court by way of these Civil Appeals.
I\
D
8. To complete the chronology of events, we may state that
in some of the cases herein the Department has levied penalty
under Section 271 C 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
E
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
F
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
G
under Section 271C, the Department has come to this Court
by way of these Civil Appeals.
I
II.
Contentions:-
9. Shri Parag P. Tripathi, learned Additional Solicitor
·•
H
34
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A 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" responsible for paying any income
8
chargeable under the head "salary",
D
(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 assesseeemployee.
10. According to the learned senior counsel, the expression
"any person" in Section 192 would include any person,
E responsible for makin1~ salary payment to an assesseeemployee, whether the eimployee 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
F 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 ),
G however, the said two expressions are used in that sub-section
in different context. The expression "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
H 192(2) authorizes the assessee-employee to choose one of the
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
35
LILLY & COMPANY (INDIA) PVT. LTD. (S.H. KAPADIA, J.]
several persons "making the payment" and not "making the A
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 B
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 c
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 D
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
E
are responsible for paying any income chargeable under the
head "salaries" to an assessee-employee in· India. In the
alternative, learned couosel 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
F
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 G
...:
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 2738 is in the nature of a civil liability.
H
36
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A According to the learned senior counsel the burden of bringing
the case within the 1~xception, namely, showing the "reasonable
cause" is squarely 1:m 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
8 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-II/Ifs Eli Lilly & Co. (India) Pvt. Ltd., submitted
C as follows.
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 Elli Lilly, Netherlands B.V. and Ranbaxy
D Laboratories Ltd .. The foreign partner had seconded four
...
expatriate(s) to the joint venture in India. They were employee(s)
by the joint ventum. 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
E 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
F under Section 19'.2(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",
G 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 lthe time of payment of salary on month-tomonth basis. Thus, Section 192 requires an estimate of
H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
37
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
income, inter alia, for the reason that the salary is liable to A
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 XVll-8,
regulating deduction of tax at source, requires such deduction 8
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 c
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 o
-1
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 E
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 128. In this connection, learned counsel placed
reliance on Section 192(2). According to the learned counsel,
F
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 G
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
J-i
38
SUPREME COURT REPORTS
[2009) 5 S.C.R.
A
employers needs to be taken into account by each employer
while deducting taix 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
B 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
c 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
D obligation does not extend to deduction of tax out of 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
E recipient emploiree. 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-deductorassessee herein and, consequently, it was not under statutory
obligation to deduct tax from the entire salary including the
F
home salary, particularly when the expatriate(s) did not exercise
.. _
the option under Section 192(2) requiring the tax-deductorassessee 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
G 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 assessiee herein in not deducting tax from the entire
ti
salary or on account of short deduction of tax at source.
H According to the learned counsel, even if the assessee herein
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI
39
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
is to be regarded as an assessee-in-default in terms of Section
A
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).
14. Shri S. Ganesh, learned senior counsel appearing on
~ehalf of Mis Ericsson Communications Pvt. Ltd. (Civil Appeal
B
No. 4082107), submitted that the TDS provisions have no extraterritorial 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
C
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
D
connection, learned counsel placed reliance on the provisions
of Sections 200, 201, 203, 203A, 206, 271C (penalty) and
2768 (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
E
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 · F
a client from abroad fo his Lawyer/Chartered Accountant/
Technical Consultant in India. These payments, according to the
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 G
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
H
40
SUPREME COURT REPORTS
[2009] 5 S.C.R.
A responsible for paying any income chargeable under the head
salaries shall, at the~ time of payment deduct income tax on the
amount payable" anid the second part consisting of the following
words:-
B
"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
C part of Section 192(1) creates the legal liability to deduct tai'c
at source whernas the second part provides for the
computation of thEl 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
D 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 amount
which is paid by a1ny other person. He is also not required to
E 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
F part of Section 1H2(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 d~:iducting the tax at source. According to the
learned counsel, the only reason why such words occur in
G 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
H deducted therefrnm at the applied rate of income tax which is
COMMISSIONER OF INCOME-TAX, NEW DELHI v.