(2009) 312 ITR 225 (SC)
TDS on salaries; consequences of failure to deduct or pay
Yes, where the payment abroad is for services rendered in India. The withholding obligation attaches to the salary as a whole, not merely to the component routed through the Indian payroll.
Must an Indian entity deduct tax on salary paid abroad by a foreign parent to expatriates working in India, where no part of that salary is paid by the Indian entity itself?
The assessee was an Indian joint venture to which expatriate employees were seconded by the foreign participant. The expatriates worked wholly for the Indian entity and were paid partly in India, on which tax was duly deducted, and partly abroad by the foreign company in home currency. The Indian entity deducted tax only on the Indian component, taking the view that it could not be required to withhold on amounts it neither paid nor controlled. The Assessing Officer held it to be an assessee in default in respect of the home-country component and raised demands for tax and interest.
The matter travelled through the appellate stages with differing outcomes and reached the Supreme Court, which considered both the extent of the obligation and the consequences where the expatriates had themselves paid tax.
For the assessee
The obligation to deduct arises on payment of salary by the payer. The Indian entity made no payment of the home-country component; that was paid abroad by a different company out of its own funds. An obligation to withhold cannot attach to a payment the assessee neither makes nor is in a position to control.
For the Revenue
The expatriates rendered their services entirely in India for the Indian entity, and the salary in both its components was consideration for that work. Splitting the payment between two jurisdictions cannot reduce the withholding obligation, or the machinery would be defeated by simple structuring.
The Court held that the withholding obligation on salary attaches to the income chargeable under that head in the employee's hands, and where services are rendered in India the whole of the salary referable to those services is chargeable, wherever it is paid. The division of the remuneration between an Indian and an overseas component was an arrangement between the group companies and could not curtail the obligation, since the Indian entity was the economic employer for whose benefit the services were rendered. The Court rejected the contention that the obligation is confined to sums physically disbursed by the Indian entity, observing that such a reading would permit the machinery to be circumvented by routing part of the remuneration offshore. It went on to address the consequences. Applying the principle in Hindustan Coca Cola, it held that where the expatriates had filed returns and paid tax on the full salary, the tax could not be recovered a second time from the Indian entity, though interest for the period of default remained payable. On penalty, the Court held that a bona fide belief, in a field where the position had not been settled, could constitute reasonable cause.
Salary withholding sits in Section 392 of the IT Act 2025, with default consequences in Section 399. The decision governs secondment and expatriate arrangements, which remain common in multinational groups, and is closely connected with the separate question whether a secondment creates a service permanent establishment or a taxable service fee — issues that are analysed together in practice.