SC tells foreign cos to deduct TDS on expat salaries

Foreign companies operating in India through joint ventures are required to deduct TDS (tax deducted at source) from home salary or special allowances paid abroad to their employees working in India, the Supreme Court has ruled.

This is an obligation of the tax deductor companies under Section 192(1) of the Income Tax Act, “particularly when no work stood performed for the foreign company and the total remuneration stood paid only on account of services rendered in India”.

The court clarified the law in a batch of 104 appeals from various high courts and tribunals, raising the question of obligation of the foreign companies.

On the question of extra-territorial operation of the Income Tax Act, the judgment explained that the general concept regarding the scope of the income tax law was that given a sufficient territorial connection 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 nexus 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,” the judgment said.

Applying that principle, the court ruled that “if the payments of home salary abroad by the 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 recipient in India as salary earned in India in terms of Section 9(1)(ii).”

However, whether the home salary payment made by the 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 facts of each case. Therefore, the court directed the assessing officers to examine each of the 104 cases to ascertain whether the employee-assessee (recipient) has paid the tax due on the home salary/special allowances received from the foreign company.

Reacting to the SC ruling, Amitabh Singh, partner at E&Y, said there were about 25 companies against which the Income Tax Department had filed cases. These included Eli Lilly, Ericsson Communications, Woodward Governors and Japanese companies Mitsui & Company and Tokyo-Mitsubishi Bank.