A large number of expatriate employees are deputed to work in India by the foreign companies. Their salary may be paid by the foreign companies, or, by Indian counterparts or by both. Further, the perquisites and other facilities may be paid/ provided partly in the foreign country and partly in India.
It is quite common that multinational companies adopt a uniform policy in respect of their employees world wide. In many cases, expatriate employees are transferred from one country to another.
Therefore, there has to be a continuity and consistency in their remuneration despite variances in local tax laws and social security regulation. Thus, it is not uncommon that expatriate employees are paid net of tax remuneration.
In view of the above, taxation of salary income creates a complex problem, since the entire salary income may not accrue in the foreign country, or, in India.
To overcome this difficulty, tax treaties usually contain a specific provision declaring that such income should normally be taxed in the employee’s country of residence, but the same may become taxable in India, if the employee stays in India for more than 183 days in a fiscal year.
However, in order to claim exemption from tax in India, following conditions should be satisfied. Total duration of employee’s stay (in aggregate) in India does not exceed 183 days in a financial year.
The remuneration for services rendered by the employee is paid by, or on behalf of an employer who is not a resident of India. The remuneration is not borne by a permanent establishment or a fixed base, which the employer has in India.
In cases where the expatriate employees are taxable in India, it is difficult to determine the obligation of Indian employer to deduct tax from the salary paid to them. In a recent case of Eli Lilly and Co. I. P. Ltd. (S.L.P. (C) No. 18062 of 2008), the assessee, a joint venture (JVC) formed between a Netherlands company and an Indian company engaged four expatriates in India.
They received salaries from the Indian JVC apart from the Netherlands company. The assessee deducted tax at source only from the salaries payable by it to these four executives and deposited it with the tax department.
The department contended that the JVC was duty-bound to deduct TDS not only in respect of the salaries payable by it to the said executives, but also in respect of salaries receivable by these executives from the collaborating company outside India.
However, the Honourble High Court held that there is no obligation of the Indian company to deduct tax at source in respect of the salary received by the expatriate employees from the foreign company.
Also, failure to deduct tax at source does not amount to infraction of law, therefore, there is no justification for claiming interest from the Indian company.
The Honourable Supreme Court rejecting the special leave petition of the department has held that the Indian company was not liable to deduct tax at source on payments to its expatriate employees by the foreign collaborators.
Obligation to deduct tax at source is also important from another angle. Salary paid to non-resident will not be allowed as deductible expense unless the tax is deducted at source and paid to the government. Liability of tax is a statutory obligation, fulfilment of which is a pre-condition for claiming the deduction.
The foreign companies are therefore advised to deduct tax at source from the remuneration paid by them to expatriate employees and pay the same to the government of India. Indian subsidiaries or JVCs should deduct TDS only on the remuneration paid by them.
The foreign companies have to deduct tax at source on that part of remuneration, which is paid by them whether in India or outside India. The same situatiaon will prevail even in cases of net of tax salary arrangement.
The author is a partner in SS Kothari Mehta & Co.
