2009 Supreme(SC) 556

2009(4) Supreme 602
SUPREME COURT OF INDIA
S.H. Kapadia and Aftab Alam, JJ.
Commissioner of Income-tax, New Delhi — Appellant(s)
versus
M/s Eli Lilly & Company (India) Pvt. Ltd. — Respondent(s)
Civil Appeal No. 5114/2007
with
C.A.No.5152/2005, C.A.No.1775/2006, C.A.No.1782/2006, C.A.No.1776/2006, C.A.No.1778/2006, C.A.No.1780/2006, C.A.No.1786/2006, C.A.No.1783/2006, C.A.No.1785/2006, C.A.No.1787/2006, C.A.No.1789/2006, C.A.No.1791/2006, C.A.No.1792/2006, C.A.No.1793/2006, C.A.No.1794/2006, C.A.No.1795/2006, C.A.No.1796/2006, C.A.No.1784/2006, C.A.No.1920/2006, C.A.No.2187/2006, C.A.No.2211/2006, C.A.No.2210/2006, C.A.No.2480/2006, C.A.No.5263/2006, C.A.No.5646/2006, C.A.No.107/2007, C.A.No. 347/2007, C.A.No.161/2007, C.A.No.159/2007, C.A.No.156/2007, C.A.No.352/2007, C.A.No.428/2007, C.A.No.434/2007, C.A.No.342/2007, C.A.No.344/2007, C.A.No.343/2007, C.A.No.345/2007, C.A.No.346/2007, C.A.No.349/2007, C.A.No. 816/2007, C.A.No.1348/2007, C.A.No.1357/2007, C.A.No.1345/2007, C.A.No.1355/2007, C.A.No.1352/2007, C.A.No.1351/2007, C.A.No.1354/2007, C.A.No.1346/2007, C.A.No.1343/2007, C.A.No. 2295/2007, C.A.No.2293/2007, C.A.No.1634/2007, C.A.No.1956/2007, C.A.No.1948/2007, C.A.No.1943/2007, C.A.No.1939/2007, C.A.No.1961/2007, C.A.No. 2121/2007, C.A.No.2294/2007, C.A.No.2292/2007, C.A.No. 4173/2007, C.A.No.4516/2007, C.A.No.4517/2007, C.A.No.3212/2007, C.A.No.3124/2007, C.A.No.3126/2007, C.A.No. 5110 - 5111/2007, C.A.No. 264/2008, C.A.No. 293/2008, C.A.No. 292/2008, C.A.No.4477/2007, C.A.No.4082/2007, C.A.No.1037/2008, C.A.No.3523/2007, C.A.No.1462/2008, C.A.No.5288/2007, C.A.No.5295/2007, C.A.No.5986/2007, C.A.No.5742/2007, C.A.No.5749/2007, C.A.No.3587/2008, C.A.No.3616/2007, C.A.No.1769/2006, C.A.No. 1890/2009 @ SLP(C)No.21443/2006, C.A. No. 1891/2009 @ SLP(C)No. 3768/2007, C.A. No. 1892/2009 @ SLP(C)No. 3769/2007, C.A. No. 1893/2009 @ SLP(C)No. 3770/2007, C.A. No. 1894/2009 @ SLP(C)No. 3771/2007, C.A. No. 1895/2009 @ SLP(C)No. 3946/2007, C.A. No. 1896/2009 @ SLP(C)No. 3947/2007, C.A. No. 1897/2009 @ SLP(C)No. 5536/2007, C.A. No. 1898/2009 @ SLP(C)No. 5646/2007, C.A. No. 1899/2009 @ SLP(C)No. 7021/2007, C.A. No. 1900/2009 @ SLP(C)No. 9641/2007, C.A. No. 1901 /2009 @ SLP(C)No. 9637/2007, C.A. No. 1902/2009@ SLP(C)No. 1953/2009 C.A. No. 1903/2009 @ SLP(C)No. 2621/2009, C.A. No. 1906/2009 @ SLP (C)No. 8879/2008, C.A. No. 1907/2009 @ SLP(C)No.28553/2008, C.A. No. 1904/2009 @ SLP(C)No. 7307/2009 (CC.No. 17118), C.A. No. 1905/2009 @ SLP(C)No. 7308/2009 (CC.No.17308), C.A. No. 1908/2009 @ SLP(C)No. 7310/2009 (CC No. 1584).
Decided on : 25-03-2009

IMPORTANT POINTS
Income actually accruing to an assessee abroad is deemed to accrue in India.
Section 9 of IT Act is, a typical example of a machinery provision which also provides for chargeability.
Section 271(C) is neither mandatory nor compensatory or automatic.

Headnote:(a) Income Tax Act, 19 61 – Section 192 – Unlike other sections in Chapter XVII-B, Section 192 requires such deduction on “estimated income” chargeable under the head “Salary” and at the time of payment of salary. (Para 21)

        (b) Income Tax Act, 1961 – Chapter XVII-B r/w section 4 – Purpose of TDS provisions in Chapter XVII B is to see that the sum which is chargeable under Section 4 for levy and collection of income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to a non-resident – TDS provisions are meant for tentative deduction of income-tax subject to regular assessment. (Para 21)

        [1999] 239 ITR – Relied upon.

        (c) Income Tax Act, 1961 – Section 9(1)(i) – Income actually accruing to an assessee abroad is deemed to accrue in India. (Para 25)

        (1949) 17 ITR 63 – Relied upon.

        (d) Income Tax Act, 1961 – Section 9(1)(ii) – 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). (Para 26)

        (e) Income Tax Act, 1961 – Section 9 – Section 9 is not only a machinery section – It has the effect of rendering a person liable to tax on income which do not accrue or arise or are not received in India but which are deemed to be taxable by virtue of Section 9 which applies to residents and non-residents – The provision is, therefore, a typical example of a machinery provision which also provides for chargeability. (Para 26)

        (f) Income Tax Act, 1961 – Extra-territorial operation – The Act has extra-territorial operation in respect of the subject-matters and the subjects which is permissible under Article 245 of the Constitution – The provisions are enforceable within the Area where the 1961 Act extends through the machinery provided under it. (Para 27)

        (g) Income Tax Act, 1961 – Section 9(1)(i) r/w Sections 160, 161, 162 and 163 – The charging section and the computation provisions together constitute an integrated Code – Section 9(1) integrates the charging section, the computation provisions as well as the machinery provisions – The computation machinery and the collection and recovery machinery cannot be segregated. (Paras 28 and 30)

        [1981] 128 ITR 294 – Relied upon.

        124 ITR 391(Gujarat) – Distinguished.

        (h) Income Tax Act, 1961 – Section 192 and Section 9(1)(ii) with Explanation – Under Section 192(1), tax at source has to be deducted on the amount payable – The tax-deductor-assessee has to estimate the income of the assessee-employee under the head “Salaries” – Under section 9(1)(ii) income chargeable under the head “Salaries” under section 15 shall be deemed to accrue or arise in India if it is earned in India, i.e., if the services under the agreement of employment are or were rendered in India – The place of receipt or actual accrual of the salary is immaterial. (Para 32)

        (i) Income Tax Act, 1961 – Section 192(1) r/w section 9(1)(ii) – If the home salary/special allowance payment made by the foreign company abroad is for rendition of services in India and if no work was found to have been performed for the foreign company then such payment would certainly come under Section 192(1) read with Section 9(1)(ii). (Para 33)

        (j) Income Tax Act, 1961 – Sections 201(1) and 201(1A) – Provisions of both the sub-sections are independent of each other – Levy of interest u/s 201(1A) is mandatory and the absence of liability for tax will not dilute the default – Interest can only be levied on assessee-in-default and the period of default starts from the date of deductibility till the date of actual payment of tax – However, the date of payment by the concerned employee can be treated as the date of actual payment. (Para 34)

        (k) Income Tax Act, 1961 – Section 271C – This provision is neither mandatory nor compensatory or automatic – No penalty shall be imposed on the person or the assessee for failure to deduct tax at source on showing by person or the assessee that there was a reasonable cause for the said failure. (Para 35)

       Facts of the case :

        1. Assessee was e ngaged in manufacturing and selling pharmaceutical products during the financial years 1992-93 to 1999-00. In the course of survey under Section 133A of the Income-tax Act, 1961, the AO noticed that the foreign company had seconded four expatriates to the Joint Venture in India; that, the tax-deductor-assessee was a Joint Venture Company; that, the appointment of the four expatriates was routed through the Joint Venture Board comprising of the Indian Partner, viz., M/s Ranbaxy Ltd. and that only part of their aggregate remuneration was paid in India by the tax-deductor-assessee. The post-survey operations revealed that no work stood performed for M/s Eli Lilly Inc., Netherlands. The AO further found that the total remuneration paid was only on account of services rendered in India and therefore in terms of Section 9(1)(ii) the income derived by the expatriates was taxable in India and subject to Section 192(1) of the 1961 Act. Consequently, the tax-deductor-assessee was asked to explain why it should not be declared as “assessee-in-default” under Section 201(1) as it had failed to deduct tax at source on the aggregate salary received by the four expatriates.

        2. In reply, the tax-deductor-assessee submitted that the four expatriates were seconded by the Foreign Company to the Joint Venture company in India; they were employed by the joint venture; they continued to be on the rolls of the said Foreign Company and they received Home Salary outside India in foreign currency from the said Foreign Company. It was further submitted that the joint venture company deducted tax at source under Section 192(1) in respect of the salary paid to the expatriates in India and that no tax stood deducted in respect of the Home Salary paid by the Foreign Company to the expatriates outside India, dehors the contract of employment in India.

        3. The AO held that the respondent herein, viz., the tax-deductor-assessee, was an “assessee-in-default” under Section 201 for failure to deduct tax at source from out of Home Salary paid by the said Foreign Company outside India and levied interest under Section 201(1A).

        4. The Tribunal and the High Court, however, held that the tax-deductor-assessee was not under statutory obligation to deduct tax at source on the Home Salary paid by the said Foreign Company under Section 192 as it was not paid by the Joint Venture Company in India and consequently the said Joint Venture was not an “assessee-in-default” under Section 201(1) of the 1961 Act.

       Finding of the Court :

        The tax-deductor-assessee was statutorily obliged to deduct tax under Section 192(1). No penalty is leviable.

       Result : Appeal partly allowed.