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. |