When foreigners are deputed to work in India, their salary may be paid in India or outside India, or sometimes partly in India and partly outside India.
In this context, it may be clarified that even if the payment of salary is made by a foreign employer to expatriate employee outside India and in foreign currency, the salary paid would be liable for Indian tax if the same is for rendition of services in India. In such a case, a question arises whether the Indian employer who has not paid that salary is statutorily obliged to deduct tax at source.
The above issue arose before Karnataka High Court in CIT v. Indo Nissin Foods Ltd (325 ITR 451). In the case an Indian company entered into a collaboration with a Japanese company. The agreement provided that the Japanese company would depute Japanese technical experts for working in India. A part of salary was paid by the Japanese company and a part was paid by the Indian company. The Department contended, the Indian company has failed to deduct tax at source on the amount paid by Japanese company outside India.
The Indian company contended, it has deducted tax at source based on the salary disbursed by it and it was not required to deduct tax on the salary paid by the Japanese company. The issue before the High Court was if the Indian company was required to deduct tax on payment by Japanese company abroad.
The Court held that when the payment is not made by the Indian company or the amount is not paid by the foreign company through the Indian company, the Indian company was not required to deduct tax at source. Similar views were expressed by Delhi High Court also in an earlier case of CIT vs. Woodward Governor P. Ltd (295 ITR 1).
On the other hand, the Supreme Court in case of CIT v. Eli Lilly and Co. (India) P. Ltd (312 ITR 225) clearly held that the “Indian tax deductor is duty bound to deduct tax at source from the home salary/allowances paid abroad by the foreign company particularly when no work stood performed for the foreign company and the total remuneration stood paid only on account of services rendered in India during the period in question”. The Supreme Court also held that tax at source had to be deducted from the salary and allowances paid abroad. Where such payment is made by an Indian entity, the tax will be deducted at source by the said Indian entity. But even if the salary/allowance are paid by a foreign entity, tax is to be deducted at source by the Indian entity from the payment made by Indian entity.
The decision of the Supreme Court is loud and clear that the Indian company is duty bound to deduct tax at source not only from the salary/allowances paid by it to expatriate employees, but also from the salary/allowances paid abroad by the foreign employer provided that the expatriate employee has rendered services in India during the period in question.
It is to be noted the decision of Supreme Court in case of CIT v. Eli Lilly and Co. (India) P. Ltd (supra) was not brought to the notice of Karnataka High Court in case of CIT v. Indo Nissin Foods Ltd. It is with utmost respect submitted that the decision of the High Court, is without making any reference to the decision of Supreme Court on the same subject and is not correct. The law laid down by the Apex Court is final that the Indian company would be liable to deduct tax at source on the salary paid by it and also on the salary paid by the foreign employer outside India if the employees are working for the Indian company in India.
(The author is a Sr. Partner in S S Kothari Mehta & Co.)
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