Page 220 - DCOM301_INCOME_TAX_LAWS_I

Unit 7: Income under the Head Salaries

Notes
are applicable to the Payer of income. The obligation of TDS on the Payer is independent
of assessment of income in the hands of all the expatriate employees and hence the
employer is obliged to deduct tax at source only from the payment made by him or
payment made on his behalf or on his account. Each employer is required to comply with
the TDS obligations in respect of Salary Income paid by him and the obligation does not
extend to deduct tax out of Salary Income paid by other persons, when it is not on account
of or on behalf of such employer, notwithstanding the fact that such salaries may have
nexus with the service of the employee with the employer (Indian Company) and may be
assessable to tax in India in the hands of the recipient employee. The payment of Home
Salary by the Foreign Company in Netherlands was not on behalf of or on account of the
Indian Company and consequently, the Indian Company was not under a statutory
obligation to deduct tax from the entire Salary Income of the expatriate including Home
Salary, particularly when the expatriates did not exercise an option under Sec.192(2)
requiring the Indian Company to deduct tax from their aggregate Salary Income. It was
also pointed out that each of the expatriate employees had paid directly the tax due on the
Home Salary by way of advance tax/self-assessment tax from time to time and they had
also filed their returns of income in India. In view of this, there is no loss to the Revenue
of the alleged default of not deducting tax on the entire Salary Income as on account of
short deduction of tax and hence, even if the Indian Company is regarded as ‘assessee-in-
default’ in terms of Sec.201 of the Act, the tax alleged to be in default cannot be once again
recovered from the Indian Company.
The counsel appearing on behalf of another Indian Company [M/s. Erection
Communications Pvt. Ltd.] raised various contentions. These include contentions with
regard to the issue that such TDS provisions have no extra-territorial operations. In this
regard it was, inter alia, submitted: there is no provision in the Act that TDS provisions
shall apply to payment made abroad by a person who is located outside India, breach of
such provisions results in severe penal and criminal action and therefore, penal and criminal
liability imposition by a statute on foreigners in respect of their acts and omissions
committed outside India should not be inferred unless there is a clear-cut provision in the
Act to that effect, applicability of TDS provisions to payment made abroad has nothing to
do with the taxability of such amount in India, there are various instances where the
amounts paid outside India by a foreigner are taxable in India, but such payments are not
subject to TDS provisions, etc. Dealing with the provisions of Sec.192(1), it was contended
that the same can be divided into two distinct parts. First part creates a legal liability to
deduct tax and the second part provides for computation of the amount of tax to be
deducted. On a plain and correct reading of the provisions creating liability to deduct tax,
the tax is deductible only from the amount paid or payable by the Payer and he is not at all
required to deduct tax in respect of the amount paid by any other person. The second part
of the provision also refers to only estimated Salary Income of the employee for the whole
financial year on the basis of payment made by the Payer (Employer). Other contentions
raised were similar to those raised by the earlier counsel.
Another counsel appearing on behalf of M/s. Mitsui & Co. Ltd. also raised similar
contentions. However, his main thrust was with regard to penalty imposed under Sec.271C.
It was contended that the retention/continuation payment made to expatriates in Japan by
Head Office (H.O.) of the Company was not taxable in India and/or TDS provisions are
not applicable to such payments. It was further stated that the Company had presented its
case before the Department to this effect. However, after consultation with CBDT, it was
agreed to pay the tax and accordingly the amount of tax and interest was deposited on the
understanding that there will not be any penalty proceeding. Accordingly, both in law
and on facts, the Department had erred in imposing penalty. To support his legal stand
Contd...

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