Volume 2, Issue 8

9th May, 2009

Tax Alert
Withholding Tax Provisions for Non-Residents Employers
Deputing Employees to India

A large number of multinational companies (MNCs) depute their employees to work in India either for their own subsidiary or for the joint venture company. These employees are generally on the payroll of the overseas company and are paid salaries abroad. Since the foreign company has no presence in India, at times, the taxes in respect of these expatriates are paid directly by the expatriate employees themselves.

Recently the Supreme Court (Apex Court in India) in case of M/s Eli Lily & Co India Private Limited held that salary paid outside India to expatriate employees seconded to India is subject to withholding tax provisions and it is the obligation of either the foreign company or its Indian counterparts to comply with the Indian withholding tax provisions.

Key Facts of the Case

  • M/s Eli Lilly Inc., Netherlands (hereinafter referred to as the ‘overseas company’) carried out its business operations through a Joint Venture Company, i.e. M/s Eli Lilly & Co. (I) Pvt. Ltd. (hereinafter referred to as the ‘taxpayer or Indian company’) in India.

  • The overseas company had seconded four expatriates to the taxpayer company in India.

  • The expatriates during the period of their secondment continued to be on the payroll of the overseas company. Further, the remuneration to the seconded expatriates was partly paid in India by the tax payer and partly by the overseas company in foreign currency outside India.

  • In relation to the portion of salary paid by the taxpayer in India, the taxpayer had withheld the taxes and paid it to the government treasury. However, no taxes were withheld on the portion of salary paid by the overseas company to the expatriates outside India.

  • The tax obligation on overseas salary was discharged by the expatriates themselves by way of advance tax / self‐assessment taxes. The Indian tax authorities argued that the taxpayer was under an obligation to withhold taxes on
    salaries paid outside India and therefore, levied interest and penalties for default in withholding tax compliances.

Issue before the Supreme Court

Whether withholding tax provisions are applicable to foreign companies on payment of salary overseas in respect of expatriates deputed to India?

If there is a default in complying with such provisions, would the foreign company / Indian company be liable to penal consequences given the fact that taxes were paid in India by the expatriate employees themselves?

Contentions of the Indian Tax Authorities

  • The current scheme and wordings of the provisions of Indian Income Tax Act casts an obligation of withholding tax on every person responsible for paying salaries – be it resident or non‐resident / foreign company and irrespective of where the salaries are paid. Accordingly, every employer (Indian and Overseas) is supposed to withhold taxes in respect of salary for services rendered in India.

  • Even if the foreign company is unable to comply with the above provisions, the Indian counterpart could comply with the same and withhold tax on the entire salary (whether paid in India or outside India).

  • The bonafide belief of the Indian company not to withhold taxes on overseas salary is not a reasonable cause for non‐levy of penalties prescribed under the Act.

Contentions of the Taxpayer

  • Each employer should be considered as a separate and independent tax deductor and is therefore, required to consider only the actual salary paid by it or paid on his behalf‐ unless the employee declares the other salary income. In the instant case, overseas salaries were not paid on behalf or on instance of the Indian company and hence the Indian company is not liable to withhold taxes.

  • In any case, there was no loss of revenue to the department given the fact that the tax liability was discharged by the employees by way of advance taxes / self assessment taxes as also the formalities relating to filing of Return of Income in India had been complied with, by the expatriate employees.

  • Since there was no loss to the Indian Government, and the Indian company was under bonafide belief that no tax is required to be deducted on overseas portion, penalty should not be levied.

Ruling of Supreme Court

  • Scheme of Withholding taxes in India and its Extraterritorial applicability:

    Based on the reading of Indian Constitution, it is permissible for the Indian tax laws to have extra‐territorial jurisdiction, in the context of withholding tax obligations on non‐resident employers having employees in India.

  • Taxability of the payments made towards salaries outside India and the consequent withholding tax compliances in India

    In the instant case, since no work was performed by the seconded employees for the overseas company and the services were rendered entirely to the Indian company, the taxpayer was under an obligation to withhold the taxes in India.

  • Levy of Interest and Penalty

    The taxpayer had not complied with the withholding tax formalities in India for the overseas salary. Accordingly, the taxpayer was liable to pay interest for default in withholding tax compliances. As far as the period of default is concerned, the period starts from the date of deductibility of taxes (i.e. when the salaries are paid) to the date of actual payment of tax by the concerned employee.

No penalty was levied as it was held that the taxpayer was under a bonafide belief and had a reasonable cause for not withholding taxes, and there was no loss of revenue since the taxes were paid by the employee.

Our Comments

This is a landmark ruling, with the Supreme Court extending the provisions of withholding taxes even to non‐resident/ foreign companiesdeputing employees to India. Thus it would be desirable for the foreign company or their Indian counterpart to now withhold taxes, even in cases where salaries are paid outside India, rather than leave it to expatriate employees.

Further, although the above decision was specific in relation to the overseas employer having employees in India, we hope that the India tax authorities do not take a cue from this decision and require all foreign companies to comply with withholding tax obligations on all other payments also. This would needlessly put additional burden on foreign companies in terms of getting the necessary registration, issuing prescribed forms for taxes withheld, filing the necessary withholding tax returns, etc.