Deducting tax on salary paid outside India

Expatriate employees’ salary for working in India is chargeable to tax in India. The tax is charged on the basis of working in India whether the salary amount is received in India or outside India. There may be cases where a part of salary and other allowances and facilities may be paid outside India. There may yet be another class of employees whose salaries are paid by foreign employers but the facilities and allowances are provided in India by their Indian counterparts.

The salary and the perquisites received outside India are also taxed in India by making a legal presump-tion that when a person is in India, his entire salary income including the value of perquisites, accrues in India.

 

The above issue was raised in a recent Supreme Court case of CIT V Eli Lilly & Co. (India) P Ltd. which was decided by Supreme Court on 25th March 2009. The Supreme Court finally held that if the home salary/special allowance payment made by the foreign company abroad is for rendition of services in India then such payment would certainly come under Section 192(1) i.e. for deduction of tax at source read with Section 9(1)(ii) (accrual of income in India). Hence the payments made abroad will also be liable to tax in India as well as for deduction of tax at source in India The Hon’ble Supreme Court rejected the contention:

That provision of deduction of tax at source will not apply if the salary is paid by a foreign company outside India dehors the contract between the foreign company and the expatriate.

 

That the contract under which salary was paid in foreign currency stood executed outside India.

 

That there is no territorial nexus with the person located outside India for payments made abroad.

As against the plea of territorial nexus, the Supreme Court observed 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.

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 above decision of the Supr-eme Court sets at rest the divergent views of various High Courts on the subject and directly overrules the decision of Delhi High Court in the case of CIT V Woodword Governor India (P) Ltd (295 ITR 1).

Woodword Governor India Pvt Ltd. was a joint venture between an Indian company and a foreign collaborator. The joint venture entity engaged one Managing Director. Some remuneration was paid by the joint venture entity & some remuneration was paid by foreign collaborator.

The Indian entity did not deduct tax on the salary paid by foreign collaborator not knowing that any payment was made by the foreign collaborator. The Delhi High Court held that the assessee was only liable to deduct tax at source on the payment it was making to its Managing Director and it can not be burdened with the liability of deducting tax at source on any other payment, either by way of salary or otherwise.

The Supreme Court 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”.

(Author is a partner in S S Kothari Mehta & Co.) 
hp.agrawal@sskmin.com