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Unit 7: Income under the Head Salaries

Notes
Eli Lilly & Co. India Pvt. Ltd. and Others —178 Taxmann 505 (SC)
In the above cases (taken up by the Apex Court together), the Home Salary was paid by a
Foreign Company to its employees seconded to the Indian Company [which was also not
reimbursed by the Indian Companies], no tax was deducted on such payments. The Indian
Companies had deducted tax under Sec.192 in respect of Salary Income paid by them to
such seconded expatriates. In some cases, the employees had filed their returns of income
in India and paid taxes on the Home Salary. In some cases, it seems, initially, a stand was
taken that Home Salary is not taxable in India, but it appears that subsequently such stand
was given up and taxes were paid. Since a large number of cases were involved, the
detailed facts in respect of each one of those cases are not available except for one case to
which reference is made hereinafter. Primarily, it seems that in all cases, the Indian
Companies were treated as ‘assessee-in-default’ under Sec.201 and interest was charged
under Sec.201(1A) and in some cases, penalty under Sec.271C was also levied for
non-deduction of tax. It seems that in all cases, the High Court had decided these issues in
favour of the Indian Companies.
In the case of M/s. Eli Lilly & Co. India Pvt. Ltd. (Indian Company), the brief facts were:
The Company was engaged in manufacturing and selling pharmaceutical products during
the Financial Years 1992–93 to 1999–2000. The Company was a J. V. Company between
Messrs. Eli Lilly Inc., Netherlands (Foreign Company) and its Indian Partner, M/s. Ranbaxy
Ltd. The Foreign Company had seconded four expatriates to the Indian Company (i.e.,
J. V. Company) and the appointment was routed through a J. V. Board consisting of Indian
Partner and the Foreign Company. Only a part of their aggregate remuneration was paid
in India by the Indian Company on which tax was deducted under Sec.192(1). These
expatriates, who were seconded by the Foreign Company to the J. V. Company in India,
also continued to be on the rolls of the Foreign Company and they received Home Salary
outside India in foreign currency from the said Foreign Company, on which no tax was
deducted. A survey under Sec.133(A) was carried out and in the course of such survey,
these facts were noticed. The post-survey operations revealed that those expatriate who
were employed by the Indian Company (on being seconded by the Foreign Company), no
work was performed by them for the Foreign Company. Based on these facts, the Assessing
Officer (A.O.) found that total remuneration paid to them was only on account of services
rendered in India and therefore, the same is taxable in India in terms of Sec.9(1)(ii), and
accordingly subject to tax deduction under Sec.192(1) of the Act. It was the contention of
the Indian Company that the Home Salary is paid by the Foreign Company to expatriates
outside India, de hors the contract of employment in India. The A.O. treated the Indian
Company as ‘assessee-in-default’ under Sec.201 in respect of Home Salary paid by the
Foreign Company outside India and levied interest under Sec.201(1A). In the Appellate
proceedings, the Tribunal and the High Court took a view that the Indian Company was
not under statutory obligation to deduct tax under Sec.192 on the Home Salary paid by the
Foreign Company, as it was not paid by the Indian Company and hence it is not an
‘assessee-in-default’. At the instance of the Department, the matter came up before the
Apex Court and the Apex Court decided to dispose of this case as well as other cases
involving similar issues together.

On behalf of the Revenue, it was submitted that Sec.192 comprises the following four
elements:
(i) It imposes an obligation of ‘deducting’ tax on ‘any person’ 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 time-frame,
Contd...

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