Holding

The TDS provisions are not independent but form an integrated code with the charging and computation provisions; Section 192(1) must be read with Section 9(1)(ii), obligating deduction of tax on home‑salary payments for services rendered in India, and penalty under Section 271C is not payable where reasonable cause is shown.

Summary

The Supreme Court examined whether the tax‑deduction‑at‑source (TDS) provisions in Chapter XVII‑B of the Income‑Tax Act are independent of the charging provisions that determine the assessability of salary income. It held that the TDS provisions are part of an integrated code and must be read with Section 9(1)(ii) (and its Explanation), which deems salary earned in India to accrue in India even if paid abroad. Consequently, a tax‑deductor‑assessee is obligated to deduct tax under Section 192(1) on home‑salary payments made by a foreign employer when the services are rendered in India. The Court also clarified that penalty under Section 271C can be imposed only where there is no good and sufficient reason, and quashed the penalty proceedings in the present batch of cases. The Appeals were partly allowed, directing the Assessing Officer to determine tax and interest liability on a case‑by‑case basis, with no order as to costs.

Issues considered

Whether TDS provisions in Chapter XVII‑B are independent of the charging provisions for income under the head ‘Salaries’.
Whether Section 192(1) applies to home‑salary payments made abroad by a foreign company when the employee renders services in India.
Whether the Income‑Tax Act’s TDS provisions have extra‑territorial operation.
The scope and applicability of penalty provisions under Section 271C and the defence of reasonable cause.
The interaction of Sections 201(1) and 201(1A) with the liability of a tax‑deductor‑assessee.

Legislation cited

Income Tax Act, 1961s. 160, s. 161, s. 162, s. 163, s. 192(1), s. 201(1), s. 201(1A), s. 271C, s. 2738, s. 4, s. 40(a)(iii), s. 4(2), s. 5, s. 5(2)(b), s. 9(1), s. 9(1)(ii)

Subjects

TDSSection 192Section 9Home SalaryExpatriateTax Deduction at SourcePenaltySection 271CIntegrated CodeExtra‑territorial operationIncome Tax Act

Judgment

(2009) 5 S.C.R. 20

A COMMISSIONER OF INCOME-TAX, NEW DELHI
II.
M/S EU· LILLY & COMPANY (INDIA) PVT. LTD.
(Civil Appeal No. 5114 of 2007)

B MARCH 25, 2009
[S.H. KAPADIA AND AFTAB ALAM, JJ.]

Income Tax Act, 1961:
c Chapter XV/1-B - Ss.192(1), 9(1)(ii) - TDS provisions
relating to payment of income chargeable under the head
'Salaries' - In the nature of machinery provisions to enable
collection and recove1y of tax - Held: Forms an integrated
code with the charging and computation provisions which
D detem1ines the assessabilityltaxability of 'Salaries' in the ~
hands '>f the employoe-assessee.
S1".~tions 201(1) and 201 (1A)- Levy of interest- Scope
of - Uiscussed - Directions issued to the AO and
Adjudicating Authority.
E
Sections 271C rlw s.2738 - Liability to levy penalty can
be fastened only on the persons who do not have good and
sufficient reason for not deducting the tax - On the facts of
the case, penalty pmceedings u/s 271C quashed.
F
The main ques.tion which arose for consideration in
the appeals filed by the Revenue was whether TDS
provisions in Chapter XVll-B of the Income Tax Act, 1961,
which are in the nature of machinery provisions to enable
G collection and rec1:>Very of taxes, are independent of the
charging provisions which determines the assessability
.,...
of income chargeable under the head 'Salaries' in the
hands of the recepient.

H 20
•
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 21
LILLY & COMPANY (INDIA) PVT. LTD.
Partly allowing the appeals, the Court A
HELD: 1.1. The scheme of the TDS provisions
applies not only to the amount paid, which· bears the
character of "income" such as salaries, dividends,
interest on securities etc. but the said provisions also
8
apply to gross sums, the whole of which may not be
income or profits in the hands of the recipient, such as
payment to contrac~ors and sub-contractors. The
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 C
thereon at the rates in force, if the amount is to be paid
to a non-resident. The said TDS provisions are meant for
tentative deduction of income-tax subject to regular
assessment. [Para 21) (54-B-D]
D
1.2. The general concept as to the scope of income-
tax is that, given a sufficient territorial connection or
nexus between the person sought to be charged and the
country seeking to tax him, income-tax may extend to
that person in respect of his foreign income. The E
connection can be based on the residence of the person
or business connection within the territory of the taxing
State; and the situation within the State of the money or
property from which the taxable income is derived. [Para
24) (55-A-B]
F
CIT v. S.G. PGNATALE 124 ITR 391(Gujarat);
Transmission Corporation of A.P. Ltd. and Anr. v. CIT [1999)
239 ITR 587 and A.H. Wadia v. CIT (1949) 17 ITR 63,
referred to.
G
'The Law and Practice of Income Tax' by Kanga and
-t Palkhivala, seventh edition, p. 10 - referred to.

2. If the payments of Home Salary abroad by the
H
22 SUPREME COURT REPORTS [2009] 5 S.C.R.

A 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 r,ecipient in India as salary earned
in India in terms of Section 9(1)(ii) (which is one of the
B heads of income). Section 9(1 )(ii) lays down that income
which falls under the head "Salaries", if it is earned in
India, shall be deemed to accrue or arise in India. In fact,
Section 9 explains the expression "is deemed to accrue
or arise to him in India" used in Section 5(2)(b). Section 9
C 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. Section 9 is, therefore, a
typical example of a combination of a machinery
0
provision which also provides for chargeability. [Para 26)
[56-B-F]

3. The 1961 Act has extra-territorial operation in
respect of the subject-matters and the subjects which is
E permissible under Article 245 of the Constitution and the
provisions are enforceable within the Area where the
1961 Act extends thrc1ugh the machinery provided under
it. [Para 27) [56-F-G]

F 4. If the income is not received in India, a non-resident
would not be chargeable to tax upon it unless it accrues
or is deemed to accrue in India. Thus, a general charge
of income-tax is imposed by Section 4 and 5, and that
general charge is given a particular application in respect
of non-residents by Section 9 which enlarges the ambit
G of taxation by deeming income to arise in India in certain
circumstances. UndEir Section 9(1), income is deemed to
accrue in India if it ac:crues directly or indirectly under five
circumstances mentioned therein. [Para 29) [57-G; 58-A-
H BJ
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 23
LILLY & COMPANY (INDIA) PVT. LTD.
CIT v. B.C. Srinivasa Setty (1981] 128.ITR 294, referred A
to.

5.1. Sections 160(1)(i), 161, 162 and 163 are
machinery sections. They do not affect the incidence of
taxation under Sections 4 and 5 which are the charging
8
sections. Sections 160 and 161 provide a machinery for
collection of a charge which is imposed in general terms
elsewhere and yet Sections 160 and 161 are the sections
which like Section 201(1) imposes a vicarious liability on
an agent to be assessed in respect of the income of the
principal. The liability is imposed under Sections 160 and C
161 in respect of the income of non-re'sident principal and
it is only in respect of the income falling within Section
9(1) and not any other income. Therefore, one has to read
Section 9(1) with Section 160 and Section 161 which are
machinery sections. (Para 29] (59-A-D] D
5.2. Similarly, Section 40(a)(iii), which finds place in
Chapter IV (computation of business income) inter alia
states that any payment which is chargeable under the
head "Salaries", if it is payable outside India or to a non- E
resident and if the tax thereon is not deducted from such
payment under Chapter XVll-8 then notwithstanding the
entitlement of the 'assessee to claim deduction, the same
will be disallowed for such non-deduction of tax at
source. Thus, the 1961 Act is an integrated code in which F
one cannot segregate the computation machinery from
the collection and recovery machinery. [Paras 29 and 30]
(59-E-G]

'The Law and Practice of Income Tax' by Kanga &
Palkhivala, eighth edition., pp. 1268 and 1269, referred to. G

6.1. Section 192 inter alia provides that any person
responsible for payment of any income chargeable under
the head "Salaries" shall at the time of payment deduct
income-tax on the basis of the rates in force for the H
24 SUPREME COURT REPORTS (2009] 5 S.C.R.

A financial year. It is true 1that the word "aggregate" does
not precede the word "income" in Section 192(1 ).
However, in Section 19:2(1), the words used are "any
income chargeable under the head "salaries" shall at the
time of payment, deduct income-tax on the amount
B payable. There is a marked similarity between Section A
192(1) and Section 40(a)(iii). The word(s) used in Section
192 is not merely "salariE!S". The words used in Section
192(1) are "any income chargeable under the head
'Salaries"'. This aspect is very important. Under the 1961
c Act, there are different categories of income enumerated
in Section 9(1). One such income falls under the head
"Salaries" if earned in India (see Section 9(1 )(ii)). Once an
income falls under Section 9 (1), it comes in the category
of income deemed to accrue or arise in India in terms of
0 Section 5(2)(b). This is one more example of the 1961 Act
being an integrated code. At this stage two aspects need
to be highlighted. Firstly, in Section 192(1), tax at source
has to be deducted on the amount payable. This is where
the tax-deductor-assessee has to estimate the income of
the assessee-employee under the head "Salaries". This
E word "payable" also find:s place in Section 40(a)(iii).
Secondly, one has to note the effect of the Explanation
to Section 9(1)(ii). [Para 32) [60-D-G; 61-A-B]

6 . 2. Section 9(1 )(ii) thus enacts that income
F chargeable under the head "Salaries" under Section 15
shall be deemed to accrue cir arise in India if it is earned
in India, i.e., if the servict~s under the agreement of
employment are or were rendered in India, the place of
receipt or actual accrual of the salary being immaterial.
G Thus, Section 192 (1) has to be read with Section 9(1 )(ii).
This is one more illustration to show that the 1961 Act is
an integrated code. In fact, if Section 192(1) is to be
segregated from Section 9(1Hii) or from Section 40(a)(iii)
then the very purpose of shifting the "accrual test" to the
H "earning test" by reason o'f insertion of Explanation,
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 25
LILLY & COMPANY (INDIA) PVT. LTD.
}
would stand defeated. Section 192(1) is the only section A

- in Chapter XVll-8, unlike other sections in that chapter,
which requires deduction of tax at source on estimation
of income chargeable under the head "Salary". The act
of "estimation" is similar to computation of income. As
stated above, the 1961 Act is an integrated Code in which B
chargeability and computation goes hand in hand. Thus,
Section 192(1), which is a stand-alone section in Chapter
XVll-8, has to be read with Section 9(1)(ii). [Para 32] (61-
E-H; 62-A]
7. It cannot be stated as a broad proposition ttiat the c
TDS provisions which are in the nature of machinery
provisions to enable collection and recovery of tax are
independent of the charging provisions which determines
the assessability in the hands of the employee-assessee.
Secondly, whether the Home Salary payment made by the D
J
Foreign Company In foreign currency abroad can be held
to be "deemed to accrue or arise in India" would depend
upon the in-depth examination of the facts in each case.
If the home salary/special allowance payment made by
the foreign company abroad is for rendition of services E
in India and if as in the present case of M/s Eli Lilly &
Company (India) Pvt. Ltd. no work was found to have
been performed for M/s Eli Lilly Inc Netherlands then such
payment would certainly come under Section 192 (1) read
with Section 9(1 )(ii). As stated above, the post-survey F

' operations revealed that no work stood performed for the
foreign company by the four expatriates to the joint
venture company in India and that the total remuneration
paid was only for services rendered in India. In such a
case the tax-deductor-assessee was statutorily obliged G
to deduct tax under Section 192 (1) of the 1961 Act. [Paril

• 33) (62·8-F]

8. A perusal of Section 201(1) and Section 201(1A)
shows that both these provisions are without prejudice
to each other. It means that the provisions of both the H
26 SUPREME COURT REPORTS [2009] 5 S.C.R.

A sub-sections are to be considered independently without
affecting the right:s mentioned in either of the sub-
sections. Further, interest under Section 201(1A) is
-
compensatory measure for withholding the tax which
ought to have gone to the exchequer. The levy of interest
B is mandatory and the absence of liability for tax will not
dilute the default. The liability of deducting tax at source
is in the nature of a vicarious liability, which pre-supposes
existence of prim;uy liability. The said liability is a
vicarious liability and the principal liability is of the person
c who is taxable. A bare reading of Section 201 (1) shows
that interest under Section 201(1A) read with Section
201(1) can only be levied when a person is declared as
an assessee-in-default. For computation of interest under
Section 201 (1A), there are three elements. One is the
D quantum on which interest has to be levied. Second is the
rate at which intere~st has to be charged. Third is the
period for which interest has to be charged. The rate of
interest is provided in the 1961 Act. The quantum on
which interest has tc1 be paid is indicated by Section 201
(1A) itself. Sub-section (1A) specifies "on the amount of
E such tax" which is mentioned in sub-section (1) wherein,
it is the amount of tax in respect of which the assessee
has been declared in default. The object underlying
Section 201 (1) is to recover the tax. In the case of short
deduction, the object is to recover the shortfall. As far as
F the period of default is concerned, the period starts from
the date of deductibmty till the date of actual payment of
tax. Therefore, the levy of interest has to be restricted for
the above stated periiod only. It may be clarified that the
date of payment by the concerned employee can be
G treated as the date of actual payment. [Para 34] [62-F-H;
63-A-E]

9. The liability to levy of penalty can be fastened only
on the person who do not have good and sufficient
H reason for not deducting tax at source. Only those
COMMISSIONER OF INCOME-TAX, NEW DELHI v. EU 27
LILLY & ·COMPANY (INDIA) PVT. LTD.
persons will be liable to penalty who do not have good A
and sufficient reason for not deducting the tax. The
burden, of course, is on the person to prove such good
and sufficient reason. In each of the 104 cases before this
Court, it is found that non-deduction of tax at source took
place on account of controversial addition. The concept B
of aggregation or consolidation of the entire income
chargeable under the head "Salaries" being exigible to
deduction of tax at source under Section 192 was a
nascent issue. It has not be considered by this Court
before. Further, in most of these cases, the tax-deductor- c
assessee has not claimed deduction under Section
40(a)(iii) in computation of its business income. This is
one more reason for not imposing penalty under Section
271C because by not claiming deduction under Section
40(a)(iii), in some cases, higher corporate tax has been D
paid to the extent of Rs. 906.52 lacs. In some of the cases,
it is undisputed that each of the expe1triate employees
have paid directly the taxes due on the foreign salary by
way of advance tax/self-assessment tax. The tax-
deductor-assessee was under a genuine and bona fide
belief that it was not under any obligation to deduct tax E
at source from the home salary paid by the foreign
company/HO and, consequently, in none of the 104 cases
penalty was leviable under Section 271 C as the
respondent in each case has discharged its burden of
showing reasonable cause for failure to deduct tax at F
source. [Para 35] [64-B-G]

10.1. The TDS provisions in Chapter XVll-B relating
to payment of income chargeable under the head
"Salaries", which are in the nature of machinery G
provisions to enable collection and recovery of tax forms
an integrated Code with the charging and computation
provisions under the 1961 Act, which determines the
assessability/taxability of "salaries" in the hands of the
employee-assessee. Consequently, Section 192(1) has to H
28 SUPREME COURT REPORTS [2009] 5 S.C.R.

A be read with Section 9'(1 )(ii) read with the Explanation
thereto. Therefore, if any payment of income chargeable
under the head "Salaries" falls within Section 9(1 )(ii) then
TDS provisions would stand attracted. In this batch of
civil appeals, identification of the recipient of salary is not
B in dispute. Therefor~•. the tax-deductor-assessee
(respondent(s)) were duty bound to deduct tax at source
under Section 192(1) from the Home Salary/special
allowance(s) paid abroad by the foreign company,
particularly when no 'Work stood performed for the
c foreign company and the total remuneration stood paid
only on account of services rendered in India during the
period in question. The AO is directed to examine each
case to ascertain wh1!ther the employee-assessee
(recipient) has paid th11 tax due on the Home Salary/
0 special allowance(s) rec1aived from the foreign company.
In case taxes due on H1:>me Salary/special allowance(s)
stands paid off then the AO shall not proceed under
Section 201(1). In cases where the tax has not been paid,
the AO shall proceed under Section 201 (1) to recover the
E shortfall in the payment of tax. [Para 36] [65-A-F]

10.2. Similarly, in each of the 104 appeals, the AO
shall examine and find out whether interest has been
paid/recovered for the pe1riod between the date on which
tax was deductible till the date on which the tax was
F actually paid. If, in any case, interest accrues for the
aforestated period and if it is not paid then the
Adjudicating Authority shall take steps to recover interest
for the aforestated period under Section 201(1A). [Para
. 37) [65-F-H; 66-A]
G
10.3. However, no penalty proceedings under
Section 271C shall be taken in any of these cases as the
issue involved was a nascent issue. Accordingly the

H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 29
LILLY & COMPANY (INDIA) PVT. LTD.
penalty proceedings under Section 271C are quashed. A
[Para 38] [65-A-B]
Case Law Reference:
124 ITR 391(Gujarat) referred to Para 21
B
(1999] 239 ITR 587 referred to Para 21
(1949) 17 ITR 63 referred to Para 25
[1981] 128 ITR 294 referred to Para 28
CIVIL APPELLATE JURISDICTION: Civil Appeal No.5114 C
of 2007.

From the Judgment and Order dated 8.11.2006 of the High
Court of Delhi at New Delhi in ITA No. 1034 of 2006.
·• D
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,
E
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, F
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, G
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.1346/2007, C.A.No.1357/2007,
H
30 SUPREME COURT REPORTS [2009] 5 S.C.R.

A C.A.No.1345/2007, C.ANo.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,
B 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 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.l\lo.1037/2008, C.A.No.3523/2007,
C.A.No.1462/2008, C.A.l\lo.5288/2007, C.A.No.5295/2007,
D
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,
E C.A.No. 1890/2009
C.A. No. 1891/2009
C.A. No. 1892/2009
C.A. No. 1893/2009
F C.A. No. 1894/2009
C.A. No. 1895/2009
C.A. No. 1896/2009
C.A.No. 1897/2009
G C.A. No. 1898/2009
C.A. No. 1899/2009
C.A. No. 1900/2009
C.A. No. 1901/2009
H
{

•'
'
--t
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 31
~ LILLY & COMPANY (INDIA) PVT. LTD.
~
•;1
C.A. No. 1902/2009 A
C.A. No. 1903/2009
C.A. No 1906/2009
C.A. No. 1907/2009
J C.A. No. 1904/2009 B
C.A. No. 1905/2009
C.A. No. 1908/2009

Arti Gupta, Vismai Rao and B.V. Bairam Das for the
Appellant.
c
\
I
Ajay Vohra, Kavita Jha, Sandeep S. Karhail, Mahua Kalra,
R.S. Suri, Jagjit Singh Chhabra, Kamal Mohan Gupta, P.V.
Yogeswaran, Bhargava V. Desai, Vikas Mehta, N. Ganpathy,
,, Dhruv Mehta, K.L. Mehta & Co. Amboj Kumar Sinha, S. D
Prasad, Rajinder Mathur, P.N. Gupta, Chandra Prakash
Pandey, Anuvrat Sharma, O.P. Khaitan and M/s. Khaitan & Co.,
for the Respondent.

The Judgment of the Court was delivered by E
S.H. KAPADIA, J. 1. Delay condoned.

2. Leave granted.
-•{
3. In this batch of civil appeals, the question which arises .F
for determination is - whether TDS provisions in Chapter XVII-
B, which are in the nature of machinery provisions to enable
collection and recovery of taxes, are independent of the
charging provisions which determines the assessability of
income chargeable under the head "Salaries" in the hands of
G
the recipient? Broadly stated, we have cases in which the tax-
' ~· deductor-assessee(s) has not deducted tax at source on the
Home Salary/special allowance(s) (education allowance or
retention) payments made by the Foreign Company/HO to its
employees (expatriates to India) outside India in foreign
currency. H
.
32 SUPREME COURT REPORTS [2009] 5 S.C.R.
!
->

?

A I. Facts in Civil Appeal No. 5114107:
.~
[CIT v. Mis Eli Lilly & Co. (I) Pvt. Ltd.]

4. Assessee was engaged in manufacturing and selling
pharmaceutical products during the financial years 1992-93 to
i
B 1999-00. In the course of survey under Section 133A of the '
Income-tax Act, 1961 ("1961 Acf' for short}, 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
c 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 Mis Eli Lilly Inc., Netherlands ("Foreign
D Company" for short). 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 expcitriates was taxable in India and subject to
Section 192(1) of the 1961 Act. Consequently, the tax-
E 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.

5. In reply, the tax-deductor-assessee submitted that the
F four expatriates were seconded by the Foreign Company to the
Joint Venture compciny 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
r, submitted that the joint venture company deducted tax at source
under Section 19~!(1) in respect of the salary paid to the
expatriates in India and that no tax stood deducted in respect
of the Home Sala1ry paid by the Foreign Company to the
expatriates outside India, dehors the contract of employment
H
'
~,

COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 33
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
·- in India. A

6. 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 B
-'
levied interest under Section 201 (1A).

• ; 7. 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 c
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. Hence, the Department has come to
this Court by way of these Civil Appeals.
I\
D
8. To complete the chronology of events, we may state that
in some of the cases herein the Department has levied penalty
under Section 271 C of the 1961 Act for failure to deduct tax
under Section 192(1) from out of Home Salary paid outside
India by the Head Office ("HO") to the expatriates deputed to E
the Branch Office(s) in India which penalty was set aside on
the ground that the expatriates exercised dual employment and
that there was no obligation on the Branch Office to deduct tax
under Section 192(1) on the Home Salary paid by the HO
outside India. It was further held that the said Home Salary paid
F
by the HO was not on account of or on behalf of the Branch
Office since no deduction was claimed for the salaries paid
outside India in computing the income of the Employer and
"'.'\'
accordingly it was held that no penalty was leviable under
Section 271C of the 1961 Act. Against deletion of penalty
under Section 271C, the Department has come to this Court G
by way of these Civil Appeals.
I
II. Contentions:-

9. Shri Parag P. Tripathi, learned Additional Solicitor H
·•
34 SUPREME COURT REPORTS [2009] 5 S.C.R.

A General on behalf of the appellants, on interpretation of Section
192 submitted that the said section comprises of four elements:-

(i) It imposes an obligation of 'deducting' tax on "any
person" responsible for paying any income
8 chargeable under the head "salary",

(ii) Clarifies that this obligation attaches itself "at the
time of payment", which is the temporal timeframe,

(iii) The rate is to be determined on the basis of the
average rate of income tax for the financial year,
and

(iv) Most importantly, the rate is to be applied "on the
estimated income of the assessee under this head
for that financial year", i.e., for the totality of the
D
assessable salary income of the assessee-
employee.

10. According to the learned senior counsel, the expression
"any person" in Section 192 would include any person,
E responsible for makin1~ salary payment to an assessee-
employee, whether the eimployee is in India or outside India or
whether the payment is made in India or outside India.
According to the learned! counsel, the only requirement is that
the assessee-employee must be paid in respect of services
F rendered in India. In this connection, learned counsel submitted
that Section 192(2) advisedly uses the expression "making the
payment". The said sub··section does not use the expression
"making the deduction". These very two expressions, according
to the learned counsel,, find place also in Section 192(1 ),
G however, the said two expressions are used in that sub-section
in different context. The expression "payment" is used in respect
of payment of salary income to the assessee-employee and the
expression "deduction" is used in respect of deduction of tax.
According to the· learned counsel, the very fact that Section
H 192(2) authorizes the assessee-employee to choose one of the
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 35
LILLY & COMPANY (INDIA) PVT. LTD. (S.H. KAPADIA, J.]
several persons "making the payment" and not "making the A
deduction" is an indication that the obligation under Section
192(1) attaches to "any" person, who is responsible for making
payment of any salary income and is not limited to a person,
who is under an obligation to deduct tax at source. This analyses
\
was advanced by the learned counsel to counter the arguments B
of one of the assessees that Section 192(1) is in two parts,
namely, one part relating to the "obligation" to deduct the tax
and the other relating to the "quantum". According to the learned
counsel, on a proper construction of Section 192(1 ), the
expression "deduct income tax on the amount payable" only
qualifies the quantum of tax to be deducted at source and not
c
the identity of the person obliged to make the payment.
Therefore, according to the learned counsel, under Section 192
there is a clear obligation to deduct tax on "any" and every
~ person responsible for paying any salary income to an
assessee-employee in India so long as the said income is D
exigible to income tax in India. Section 192(2), according to the ·
learned counsel, mitigates the rigours of Section 192(1 ). In
conclusion, learned counsel submitted that Section 192
imposes a joint and several obligation on all the persons, who
are responsible for paying any income chargeable under the E
head "salaries" to an assessee-employee in· India. In the
alternative, learned couosel submitted that even if it were to be
held that it is only the Indian employer who is obliged to deduct
tax at source and not the foreign employer (who is directly
paying to the foreign account of the expatriate employee F
outside India), particularly in view of the amendment to Section
9(1)(ii), the obligation of the Indian employer has to be
interpreted coextensively and in respect to the entire salary
income of the expatriate employee so long as the salary income
of such an employee arises or accrues in India or is in respect G
...:
of "services rendered in India" .

11. On the penalty issue, learned Additional Solicitor
General submitted that the imposition of penalty under Section
271C read with Section 2738 is in the nature of a civil liability.
H
36 SUPREME COURT REPORTS [2009] 5 S.C.R.

A According to the learned senior counsel the burden of bringing
the case within the 1~xception, namely, showing the "reasonable
cause" is squarely 1:m the assessee. On facts, in the context of
penalty, learned counsel submitted that in each of these civil
appeals the respondents-assessees have pleaded bona fide
8 misunderstanding of law, which explanation, according to the
learned senior counsel, does not satisfy the test of "reasonable
cause" and therefore merits rejection.

12. Shri Ajay Vohra, learned counsel appearing on behalf
of the respondent-II/Ifs Eli Lilly & Co. (India) Pvt. Ltd., submitted
C as follows.

13. M/s Eli Lilly & Co. (India) Pvt. Ltd. was incorporated
in India under the Companies Act, 1956. It was a joint venture
between M/s Elli Lilly, Netherlands B.V. and Ranbaxy
D Laboratories Ltd .. The foreign partner had seconded four ...
expatriate(s) to the joint venture in India. They were employee(s)
by the joint ventum. They, however, continued to remain on the
rolls of the foreign company. They received home salary outside
India from the foreign partner. The joint venture company
E deducted tax under Section 192(1) in respect of the salary paid
by it to the expatriate(s) in India, however, no tax stood
deducted in respect of the said home salary paid by the foreign
company. In the circumstances, learned counsel contended that
the assessee herein was under no obligation to deduct tax
F under Section 19'.2(1) of the 1961 Act from the "home salary",
which admittedly was not paid by the assessee herein.
According to the learned counsel, Section 192 enjoins upon
the person responsible for paying salary to deduct tax out of
the estimated income chargeable under the head "salaries",
G at the time of making payment thereof. The employer is thus
. expected to make an honest and bona fide estimate at the
beginning of the year of the income of the employee
chargeable under the head "salaries" and deduct tax at the
average rate at lthe time of payment of salary on month-to-
month basis. Thus, Section 192 requires an estimate of
H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 37
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]

income, inter alia, for the reason that the salary is liable to A
change during the year on account of increment, pay revision,
payment of bonus, DA etc. and also on account of valuation of
perquisites in kind. Section 192 of the 1961 Act, according to
the learned counsel, unlike other sections in Chapter XVll-8,
regulating deduction of tax at source, requires such deduction 8
to be made on estimated income chargeable under the head
"salaries" and at the time of payment of salary. The obligation
under Section 192(1) is on the person responsible for paying,
to deduct tax at source on the income of the employee
chargeable under the head "salaries". Therefore, according to c
the learned counsel, the obligation of the assessee herein
(employer) is to deduct tax at source qua the amounts actually
paid by the employer or paid on his behalf or on his account.
This question as to whether payment has been made on behalf
of or on account of the employer has to be decided on facts of o
-1 each case. According to the learned counsel, the 1961 Act and
the Rules framed thereunder recognize deduction of tax by
different units of the same employer by treating each unit as a
separate and independent deductor. In this connection, reliance
was placed on Rule 114A of the Rules and Circular No. 719 E
dated 22.8.1995. According to the learned counsel, where an
employee is simultaneously employed with more than one
employer, the employee has an option to file with one employer
(the chosen employer), a declaration of the salary earned by
"" him in Form 128. In this connection, learned counsel placed
reliance on Section 192(2). According to the learned counsel, F
the chosen employer, in such circumstances, would be liable
to deduct tax on the total income taxable under the head
"salaries". In the absence of exercise of option under Section
192(2), the obligation of each employer, according to the
learned counsel, is confined to the amounts of salary actually G
paid and there is no statutory obligation on one employer to
take into· account the salary paid by the other employer and
deduct tax from the gross salary. Therefore, according to the
learned counsel, there is nothing in Section 192(1) to suggest
that the aggregate salary received by an employee from various J-i
38 SUPREME COURT REPORTS [2009) 5 S.C.R.

A employers needs to be taken into account by each employer
while deducting taix at source. According to the learned counsel,
the TDS provisions are in the nature of machinery provisions
which enables easy collection and recovery of tax. The said
provisions are independent of the charging provisions which are
B applicable to the recipient of income whereas the TDS
provisions are applicable to the payer of income. According to
the learned counsel, therefore, the obligation to deduct tax at
source is on the deductor, which is independent of the
assessment of income in the hands of the expatriate
c employee(s); the deductor is obliged to deduct tax at source
only from the payment made by the deductor or payment made
on his behalf or on his account. Therefore, according to the
learned counsel, each employer is required to comply with and
deduct tax from out of the salaries paid by such employer. The
obligation does not extend to deduction of tax out of salaries
D
paid by any other person, which is not on account of or on
behalf of such employer, notwithstanding that such salaries may
•
have nexus with the service of the employee with that employer
and may be assessable to tax in India in the hands of the
recipient emploiree. According to the learned counsel, on facts,
E the payment of salary by the foreign company in Netherlands
was not on behalf of or on account of the tax-deductor-
assessee herein and, consequently, it was not under statutory
obligation to deduct tax from the entire salary including the

F
home salary, particularly when the expatriate(s) did not exercise . _

the option under Section 192(2) requiring the tax-deductor-
assessee herein to deduct tax from their aggregate salary
income. Lastly, learned counsel submitted that each of the
expatriate employee(s) had paid directly the taxes due on the
home salary by way of advance tax/self-assessment tax from
G time to time. They had filed also the Return of Income. In such
circumstances, according to the learned counsel, there was no
loss to Revenue occasioned on account of the alleged default •
by the assessiee herein in not deducting tax from the entire
salary or on account of short deduction of tax at source. ti
H According to the learned counsel, even if the assessee herein
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 39
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
is to be regarded as an assessee-in-default in terms of Section A
201 of the Act, the tax alleged to be in default cannot be once
again recovered from the assessee herein since the same
stood paid by the expatriate(s).

14. Shri S. Ganesh, learned senior counsel appearing on
~ehalf of Mis Ericsson Communications Pvt. Ltd. (Civil Appeal B
No. 4082107), submitted that the TDS provisions have no extra-
territorial operation. In this connection, learned counsel urged
that there is no provision in the 1961 Act which says that TDS
provisions shall apply to payment made abroad by a person
who is located outside India. Learned counsel next contended C
that breach of such provisions results in severe penal and
criminal sanctions and therefore penal and criminal liability
imposition by a statute on foreigners in respect of acts and
omissions committed outside the country should not be inferred
unless there is a clear cut provision in the said 1961 Act. In this D
connection, learned counsel placed reliance on the provisions
of Sections 200, 201, 203, 203A, 206, 271C (penalty) and
2768 (prosecution). The learned counsel next contended that
the issue as to whether the TDS provisions are applicable to
payments made abroad has nothing to do with assessability E
of such amounts in the hands of the recipient. In this connection,
learned counsel stated that there are several payments which
do not attract TDS provisions, but which are assessable to tax
in the hands of the recipient, e.g., salary paid by a foreign
employer to his employee in India or professional fees paid by · F
a client from abroad fo his Lawyer/Chartered Accountant/
Technical Consultant in India. These payments, according to the
learned counsel, are undoubtedly taxable in India in the hands
of the recipient. Nevertheless, no tax would be deductible at
source thereon as they are made outside India and are not G
subject to the TDS provisions.

15. On the point of interpretation of Section 192(1), learned
counsel submitted that the said section can be divided into two
distinct parts, the first part consisting of the words "any person H
40 SUPREME COURT REPORTS [2009] 5 S.C.R.

A responsible for paying any income chargeable under the head
salaries shall, at the~ time of payment deduct income tax on the
amount payable" anid the second part consisting of the following
words:-

"at the average rate of income tax, computed on the basis
B
of the rates in force in the financial year in which the
payment is made, on the estimated income of the
assessee under this head for the financial year."

The submission made by the learned counsel was that the first
C part of Section 192(1) creates the legal liability to deduct tai'c
at source whernas the second part provides for the
computation of thEl amount of tax to be deducted. According
to the learned counsel, the first part of Section 192(1) makes
it clear that the tax has to be deducted on the amount payable
D by the person concerned. According to the learned counsel, on
a plain and correct reading of Section 192(1 ), tax is deductible
from the amount paid or payable by the person concerned and
he is not at all required to deduct tax in respect of an amount
which is paid by a1ny other person. He is also not required to
E take into account the amount received by the employee from
other sources or to deduct tax taking into account such other
amounts. Learned counsel further submitted that in the second
part of Section 192( 1) the words used are "estimated income
of the assessee". According to the learned counsel, the second
F part of Section 1H2(1), therefore, refers only to the estimated
income of the recipient employee for the whole financial year
on the basis of the payments made to him by the person
responsible for d~:iducting the tax at source. According to the
learned counsel, the only reason why such words occur in
G Section 192(1) and not in any other sections dealing with
deduction of tax on other items of income is that there is no
fixed rate of tax to be applied for determining tax at source on
salaries. In this connection, learned counsel pointed out that
salary is paid on a monthly basis and the tax has to be
H deducted therefrnm at the applied rate of income tax which is
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 41
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
arrived at by considering the employee's estimated salary A
income received from the person concerned for the entire
financial year. That is why, according to the learned counsel,
even in Section 192(2) a provision is made to the effect that it
is only in special and extraordinary circumstances mentioned
therein that a particular employer is required to consider the B
payments made to the employee by another employer. As a
corollary, according to the learned counsel, if the extraordinary
circumstances mentioned in Section 192(2) do not exist, as in
ordinary cases covered by Section 192(1), then the employer,
who has to deduct tax at source, is required to consider only c
the payments made by him and not payments received by the
employee from any other sources. According to the learned
counsel, the present cases are not governed by Section 192(2).
Therefore, in M/s Ericsson Communications Pvt. Ltd. case,
according to the learned counsel, the employer was not liable
J D
in law to deduct tax at source in respect of the "child education
payments" made by a Swedish company to its expatriate
employee(s) in Sweden. In the alternative, learned counsel
urged that the assessee was under the bona fide impression
that it was not required to deduct such tax at source in respect
of the said expatriate employee(s}, which bona fide impression E
constituted "reasonable cause" and therefore, in any event, no
penalty could be imposed on the assessee under Section
271C read with Section 2738 of the 1961 Act.

16. Shri M.S. Syali, learned senior counsel appearing on F
behalf of M/s Mitsui & Company Ltd. (Civil Appeal No. 5152/
05) submitted that the sole issue in his case was whether the
Tribunal/High Court were correct in law in cancelling the penalty
imposed under Section 271 C of the 1961 Act. It was submitted
that the retention/continuation payment(s) to expatriates in G
Japan by the HO was not taxable in India and/or the provisions
_./
of Chapter XVll-B requiring deduction of tax at source were not
appliqable to such payment. It was further submitted that the
respondent is a foreign company having its HO in Tokyo. It had,
in the relevant financial years in India, a Project Office and a H
42 SUPREME COURT REPORTS [2009) 5 S.C.R.

A Liaison Office. The Japanese expatriates were deputed to the
said Establishments as employees. As per the terms of
deputation, the said expatriates were to be paid "salaries" for
the services rendered in India by the respective Establishment,
in addition, a retention/continuation was paid in Japan by the
B HO to ensure continuity in service. Tax at source was deducted
by the respective Establishment, however, on the retention/
continuation paid iry Japan by HO, it was not deducted under
Chapter XVll-B of the 1961 Act. On facts, learned counsel
pointed out that th1~ tax-deductor-assessee presented its case
c before the Department. Its stand was not accepted by the
Department. However, after consultation with the CBDT, the tax-
deductor-assessee agreed and deposited the tax and interest
on the understanding that there will not be any penalty
proceedings. According to the learned counsel, contrary to its
D promise, Departm1:mt commenced penalty proceedings under
Section 271 C against the Project Office and the Liaison Office
in India for the alle1ged default of the HO in Japan. Therefore,
according to the learned counsel, both, in law and on facts, the
Department had erred in initiating penalty proceedings under
Section 271 C.
E
17. On the legal issu.e, learned counsel contended that the
Department was .not. right in its submission that after the
amendment of S1ection 9(1)(ii) made to the Act after the
decision in the case of CIT v. S. G. PGNA TALE reported in 124
F ITR 391 (Gujarat), retention/continuation dues can be construed
as income under the head "salaries". According to the learned
counsel, the Gujarat High Court (supra) had held that amounts
paid outside India by the French company for rendering
services in India though referred to as "retention remuneration"
G was not liable to tax in India because the word "earned" has a
narrow as well as wider meaning. In view of the difference in
the language in cllauses (ii) and (iii) of Section 9(1), salaries
earned in India shall be governed by the n·arrower meaning.
Accordingly, the Gujarat High Court in the above judgment
H equated the words "salaries earned in India" to "arising/
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 43
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]

accruing in India". According to the Gujarat High Court, A
therefore, although the amount payable was for rendering
services in India but having been paid by a person responsible
outside India, the said earning of salaries cannot be treated as
having accrued or arisen in India. In order to nullify the effect of
the judgment of the Gujarat High Court, according to the learned B
>. counsel, an Amendment was brought in Section 9(1)(ii) adding
an Explanation thereto by which the above decision of the·
Gujarat High Court stood overruled. By the said Amendment,
it was stipulated that income which falls under the head
"salaries" if earned in India will include such income payable c
for services rendered in India. According to the learned counsel, '
the insertion with retrospective effect from 1.4.1979 by' fhe
Finance Act, 1983, however, was not all inclusive. According
to the learned counsel, despite the said Amendment, amounts
paid to foreign technicians for "off period" could not be taxed
0
as "salary". Being aware that the Explanation, as it stood at that
time, did not include within Its purview the salary paid for the
"off period", the Legislature once again amended the
Explanation to Section 9(1)(ii), explaining its scope to include
therein the salary paid for the rest period or leave period, but, E
only such, which is preceded or succeeded by services
rendered in India and which forms part of the service contract
of employment. However, such Explanation of the scope of
Section 9(1 )(ii) only took effect from 1.4.2000 and it applied
only in relation to the Assessment Year 2000-2001 and
subsequent years thereto. The Explanation was made expressly F
prospective. Therefore, according to the learned counsel, any
and everything paid to an employee does not fall within the
scope of Section 9(1 )(ii). According to the learned counsel, it
is only when rendition of service takes place, that the amount
is liable to be taxed in India and not otherwise. The mere fact G
that the amount flows from the employer does not render it
taxable even under the amended Section 9(1 )(ii) read with the
Explanation.
18. According to the learned counsel, Section 192 does H
44 SUPREME COURT REPORTS [2009] 5 S.C.R.

A not have extra-territorial operation. On this point, we find that
the arguments advanced by Shri M.S. Syali, learned senior
counsel appearing for M/s Mitsui & Co. Ltd. are similar to the
submissions made by Shri S. Ganesh, learned senior counsel
appearing for M/s Ericsson Communications Pvt. Ltd., which
B submissions are stated hereinabove. Hence, we need not
repeat such submission and burden this judgment. Lastly, Shri
Syali, learned senior counsel, submitted that Section 192
mandates deduction of tax at source by "any" person
responsible for paying "any" income chargeable under the head
c "salaries". The dedllction from the said income, according to
the learned counsel, is stipulated to be "on the amount payable".
According to the learned counsel, therefore, there is no basis
for reading Section '192 as imposing a liability on "any" person
responsible for paying such income to deduct tax from the
entire income chargeable under the said head. According to
0
the learned counsel, the words "on the amount payable" and
"any income" clearly' mandate that the person responsible for
paying is concerned only with the amount that is payable by him.
According to the learned counsel, the person responsible is not
E obliged under Secticin 192 to deduct tax on the entire "amount
payable". According to the learned counsel, Section 192 inter
alia stipulates that within the amount payable, he has to arrive
at the "estimated income" of the assessee under the head
"salaries" for the finaincial year. The words "estimated income"
is the net figure calculated under the relevant provisions on
F estimate basis from the amount payable. The entire salary is I ,
not paid in one go and, therefore, out of the estimated amount
payable for that financial year, income for the month under the
said head is to be ascertained and accordingly one has to
determine the appropriate average rate. According to the
G learned counsel, each Establishment, i.e., the Project Office
and the Liaison Office (in this case) has to be treated as
separate and ind1~pendent entities for the purpose of
applicability of Section 192 and for compliance with other
provisions in Chapteir XVll-B and consequently the assessee
H has not erred theri:ifore in treating the HO a distinct and
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 45
Lill Y & COMPANY {INDIA) PVT. LTD. [S.H. KAPADIA, J.)

separate person responsible for paying. Therefore, according A
to the learned counsel, no default could be attributed merely
because the assessee agreed with the Department's
understanding of the said provisions. In this connection, learned
counsel placed reliance on Sections 159A, 203 Rule 114A and
)
Form 498. He also relied upon Rule 36A and Rule 37 of the B
Income-tax Rules, 1962. Learned counsel next contended that
"
under Section 204(i), the person responsible for paying would
cover either the employer himself or if the employer is a
company the company itself including its principal officer.
According to the learned counsel, the definition contemplates c
two situations - where the branch is the person responsible, it
acts as the employer, and where centralized compliance is
made, the company is treated as the employer. According to
the learned counsel, in cases where the Liaison Office and the
Project Office are separate employers distinct from the D
company, as the company itself is not an assessee paying taxes
on its global income, then the employer is not the company. In
such cases, the persons who need to comply with the
provisions is either the Project Office or the Liaison Office. In
this connection, learned counsel placed reliance also on
E
Section 192(2) which stipulates that in case of successive or
simultaneous employers, the sub-section enables the employee
to furnish particulars in respect of salaries due or received by
him from one employer to the other. These particulars are
required to be taken into account by the chosen employer to
examine its impact upon the average rate of tax and the F
quantum of tax that is to be deducted by the chosen employer.
According to the learned counsel, the sub-section does not cast
vicarious liability of one employer upon the other. Each
employer, be it successive or simultaneous, is independently
liable to comply with the TDS provisions in respect of the G
~ amount it pays. Therefore, according to the learned counsel,
the said sub-section belies the concept of aggregation or
consolidation of the entire amount under the head "salaries"
being exigible to deduction of tax at source under Section 192
in the hands of one person responsible for paying a part H
46 SUPREME COURT REPORTS [2009] 5 S.C.R.

A thereof. Lastly, learned counsel submitted that the issue
involved in these civil appeals is nascent. It involves a moot
point. It has not been considered by the Apex Court earlier.
-
Therefore, in any event, this case is not a fit case for imposing
penal consequences.
8
19. Shri C.S. Agari111al, learned senior counsel, Shri Kannan
Kapoor, and Shri Salil Kapoor, learned counsel appearing for
various other assessees have adopted the arguments
mentioned hereinabove.

C Ill. Relevant Provisions of the Income-tax Act, 1961:

Section 2 - Definitions.

,"2.(37A) "Rate or rates in force" or "rates in force", in
relation to an ass,essment year or financial year, mean-
D
(i) for the purposes of calculating income-tax under the
first proviso to sub-section (5) of section 132, or
computing the income-tax chargeable under sub-
section (4) of section 172 or sub-section (2) of
E section 1i'4 or section 175 or sub-section(2) of
section 1716 or deducting income-tax under section
192 from income chargeable under the head .
"Salaries" or computation of the "advance tax"
payable under Chapter XVll-C in a case not falling
F under section. 115A or section 1158 or section
11588 or section 115888 or section 115E or
section 164 or section 164A or section 1678, the
rate or rat1:is of income-tax specified in this behalf
in the Finance Act of the relevant year and for the
G purposes of computation or of the "advance tax"
payable under Chapter XVll-C, in a case falling
under section 115A or section 1158 or section
11588 or section 115888 or section 115E or
section 1Ei4 or section 164A or section 1678, the
rate or rates specified in section 115A or section
H
,
1 COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 47
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
1158 or section 11588 or section 115888 or A
section 115E or section 164 or section 164A or
section 1678, as the case may be, or the rate or
rates of income-tax specified in this behalf in the
Finance Act of the relevant year, whichever is
applicable. 8

(ii) for the purposes of deduction of tax under sections
193, 194, 194A, 1948, 19488 and 1940 the rate
or rates of income-tax specified in this behalf in the
Finance Act of the relevant year;
c
(iii) for the purposes of deduction of tax under section
195, the rate or rates of income-tax specified in this
behalf in the Finance Act of the relevant year or the
rate or rates of income-tax specified in an
agreement entered into by the Central Government D
under section 90, or an agreement notified by the
.
• Central Goverlilment under section 90A, whichever
is applicable by virtue of the provisions of section
90, or section 90A, as the case may be."
·' E
Income deemed to acc11ue or arise in India.
(;,

"Section 9.(1) The following incomes shall be deemed to
. accrue or arise in India-
(i) ·F
(ii) Income which falls under the head "Salaries", if it is
earned in India.
"J.'

Explanation.-(lnserted by the Finance rAct; 1983, with
retrospective effect from 1.4.1979) - For the removal of doubts, G
it is hereby declared that income of the nature referred to in
this clause payable for service rendered in India shall be
'. regarded as income earned in India.

Explanation.- .-(Substituted by the Finance Act, 1999, H
48 SUPREME COURT REPORTS [2009) 5 S.C.R.

A w.e.f. 1.4.2000)- For the removal of doubts, it is hereby
declared that the income of the nature referred to in this
clause payable for-

(a) service rendered in India; and
B (b) the rest period or leave period which is preceded
and succe!eded by services rendered in India and
forms par1t of the service contract of employment,

shall be regarded as income earned in India."
c Amounts not DE~ductible.-

Section 40

"Notwithstandin~1 anything to the contrary in sections 30 to
D 38, the following amounts shall not be deducted in
computing the income chargeable under the head "Profits
and gains of business or profession", -

(a) In the case of any assessee -
E (i) any interest (not being interest on a loan
isi~ued for public subscription before the 1st
day of April, 1938), royalty, fees for technical l

services or other sum chargeable under this
Act, which is payable,-
F
(A) outside India; or

(13) in India to a non-resident, not being a
company or to a foreign company,

G on which tax is deductible at source under Chapter XVll-
B and such tax has not been deducted or, after deduction,
has not been paid during the previous year, or in the
subsequent y13ar before the expiry of the time prescribed
under sub-seGtion(1) of section 200:"
H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 49
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.] .

A

"(iii) any payment which is chargeable under the head
"Salaries", if it is payable-

(A) outside 1.ndia; or
B
(B) to a non-resident,

and if the tax has not been paid thereon nor
deducted therefrom under Chapter XVll-B;"

Deduction at source and advance payment.- c
"Section 190:

(1) Notwithstanding that the regular assessment in
respect of any income is to be made in a later
0
assessment year, the tax on such income shall be
payable by deduction or collection at source or by
advance payment or by payment under sub-section
(1A) of section 192, as the case may be, in
accordance with.the provisions of this Chapter.
E
(2) Nothing ih this section shall prejudice the charge of
·' tax on such income under the provisions of sub-
section (1) of section 4."

Direct Payment.- F
"Section 191 :

In the case of income in respect of which provision
is not made under this Chapter for deducting income-tax
at the time of payment, and in any case where income-tax G
has not been deducted in accordance with the provisions
of this Chapter, income-tax shall be payable by the
assessee direct.

Explanation.- For the removal of doubts, it is hereby H
50 SUPREME COURT REPORTS (2009] 5 S.C.R.

A declared that if ainy person referred to in section 200 and
in the cases referred to in section 194, the principal officer
and the company of which he is the principal officer does
not deduct the whole or any part of the tax and such tax
has not been paid by the assessee direct, then, such
B person, the principal officer and the company shall, without
prejudice to any other consequences which he or it may
incur, be deemed to be an assessee in default as referred
to in sub-section (1) of section 201 in respect of such tax."

c Salarv.·
"Section 192.-

(1) Any pers;on responsible for paying any income
chargeable under the head "Salaries" shall, at the
D time of payment, deduct income-tax on the amount
payable at the average rate of income-tax
computed on the basis of the rates in force for the
financial irear in which the payment is made, on the
estimated income of the assessee under this head
for that financial year."
E
Consequences of 1=ai1ure to Deduct or Pay:-
"Section 201:

(1) If any suc:h person referred to in section 200 and in
F
the case~> referred to in section 194, the principal
officer and the company of which he is the principal
officer does not deduct the whole or any part of the
tax or afte!r deducting fails to pay the tax as required
by or under this Act, he or it shall, without prejudice
G to any other consequences which he or it may incur,
be deemi~d to be an assessee in default in respect
of the tax:

Provided that no penalty shall be charged under
H section 221 from such person, principal officer or
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 51
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
company unless the Assessing Officer is satisfied A
that such person or principal officer or company, as
the case may be, has without good and sufficient
reasons failed to deduct and pay the tax.

(1A) Without prejudice to the provisions of sub-section 8
(1), if any such person, principal officer or company
as is referred to in that sub-section does not deduct
the whole or any part of the tax or after deducting
fails to pay the tax as required by or under this Act,
he or it shall be liable to pay simple interest at one C
per cent for every month or part of a month on the
amount of such tax from the date on which such tax
was deductible to the date on which such tax is
actually paid and such interest shall be paid before
furnishing the quarterly statement for each quarter
-I
in accordance with the provisions of sub-section (3) D
of section 200."
Penalty for Failure to Deduct Tax at Source:

"Section 271C: (1) If any person fails to -
E
(a) Deduct the whole or any part of the tax as required
by or under the provisions of Chapter XVll-8; or

(b) Pay the whole or any part of the tax as required by
or under, - F

(i) Sub-section (2) of section 115-0; or

(ii) Second proviso to section 1948,

then, such person shall be liable to pay, by way of penalty, G
a sum equal to the amount of tax which such person failed
to deduct or pay as aforesaid.
(2) Any penalty imposable under sub-section (1) shall
be imposed by the Joint Commissioner."
H
52 SUPREME COURT REPORTS [2009] 5 S.C.R.

A Penalty not to be imposed in Certain Cases:

Section 2738:

"Notwithstanding anything contained in the provisions of
clause (b) of sub-section (1) of section 271, section 271A,
B section 271AA, section 271 B, section 271 BA, section
271 BB, section ~~71 C, section 271 CA, section 271 D,
section 271E, section 271F, section 271FA, section
271 FB, section 2i'1 G, clause (c) or clause (d) of sub-
section (1) or sub-section (2) of section 272A, sub-section
c (1) of section 272AA, or sub-section (1) of section 272BB
or sub-section (1A) of section 272BB or sub-section (1)
of section 272BBB or clause (b) of sub-section (1) or
clause (b) or clausei (c) of sub-section (2) of section 273,
no penalty shall be imposable on the person or the
D assessee, as the case may be, for any failure referred to
in the said provisions if he proves that there was
reasonable cause for the said failure."

IV. Issue:
E 20. Whether TDS provisions which are in the nature of
machinery provisions enabling collection and recovery of tax are I

independent of the charg.ing provision which determines the
assessability in the hands of the employee-assessee
(recipient)? In other words, whether TDS provisions under the
F Income-tax Act, 1961 are applicable to payments made abroad
by the Foreign Company, which payments are for Income
chargeable under the Head "Salaries" and which are made to
expatriates who had rendered services in India?

G V. Our Decision:
(i) Whether TDS provisions which are in the nature of
.
machine!'.Y provisions are! independent of the Charging
Provisions?

H 21. At the outset, we wish to clarify that our judgment is
-<'. COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 53
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
confined strictly to the question of deductibility of tax from the A
"income chargeable under the Head 'Salaries'" under Section
192(1 ). This introduction is important for the reason that unlike
other sections in Chapter XVll-8 regulating deduction of tax at
source out of Other Payments, Section 192 requires such
deduction on "estimated income" chargeable under the head 8
"Salary" and at the time of payment of salary. Chapter XVII is
divided into various parts as 'A' to 'F'. Part 'A' deals with
deduction at source and advance payment. Section 190, inter
a/ia, provides that notwithstanding the regular assessment in
respect of any income, the tax on such income shall be payable c
by deduction or collection at source or by advance payment in
accordance with the provisions of the Chapter. Hence, before
a regular assessment is made, tax on income becomes

- ·l
· payable by deduction or collection at source or by advance
payment in accordance with the provisions of the Chapter.
Section 191 provides for direct payment of income-tax by the
assessee in cases where provision for deduction of tax at
D

source is not made under the Chapter. Part 'B' of Chapter XVII
contains a group of sections which provides for "deduction of
tax" at source. Section 192 provides for deduction of tax on the
E
income chargeable under the head "Salaries" by any person
responsible for paying such salaries. Section 193 provides for
• deduction of income-tax by the person responsible for paying_
any income by way of "interest on securities". Section 194
provides for deduction of tax at source by the company paying
"dividends". Section 194A, Section 1948, Section 19488 inter F
a/ia provides for deduction of tax at source from the income of
interest other than interest on securities, winnings from lotteries,
winnings from horse race respectively. Even with regard to
payment to contractors and sub-contractors, specific provision
is made for deducting tax at source on the basis of payment G
of such sum as the income-tax on income comprised therein.
Under the 1961 Act, total income for the previous year is
chargeable to tax under Section 4. Section 4(2) inter alia
provides that in respect of income chargeable under Section
4(1 ), incom~-tax shall be deducted at source where it is so H
54 SUPREME COURT REPORTS (2009] 5 S.C.R.

A deductible under any provision of the 1961 Act. Section 192(1)
falls in the machinery provisions. It deals with collection and
recovery of tax. That provision is referred to in Section 4(2).
Therefore, if a sum that is to be paid to the non-resident is
chargeable to tax, tax is required to be deducted. The sum
B which is to be paid may be income out of different heads of
income mentioned in Section 14, that is to say, income from
salaries, income from house property, profits and gains of
business, capital gains and income from other sources. The
scheme of the TDS provisions applies not only to the amount
c paid, which bears the character of "income" such as salaries,
dividends, interest on securities etc. but the said provisions
also apply to gross sums, the whole of which may not be income
or profits in the hands of the recipient, such as payment to
contractors and sub-contractors. The purpose of TDS
provisions in Chapter XVIII B is to see that the sum which is
0
chargeable under Section 4 for levy and collection of income- ·-
tax, the payer should deduc:t tax thereon at the rates in force, if
the amount is to be paid to a non-resident. The said TDS
provisions are meant for tentative deduction of income-tax
E subject to regular assessment. (see Transmission Corporation
of A.P. Ltd. and Anr. v. CIT reported in [1999] 239 ITR 587 at
p. 594).
22. As stated above, the question which arises for
determination is: whether TDS provisions in Chapter XVll-8,
F which are in the nature of machinery provisions enabling
collection and recovery of tax are at all applicable to payments
made abroad by the Foreign Company/HO who had seconded
the expatriate(s) for rendering services in India to the tax-
deductor-assessee (employer)?
G
23. To answer the above question one needs to examine
the issue - whether TDS provisions have extra-territorial
operations as also the inter-linking of various provisions in the
1961 Act dealing with chargeability, liability, collection and
recovery of taxes.
H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 55
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
24. On the question of extra-territorial operation of the A
1961 Act the general concept as to the scope of income-tax is
that, given a sufficient territorial connection or nexus between
the person sought to be charged and the country seeking to tax
him, income-tax may extend to that person in respect of his
foreign income. The connection can be based on the residence B
of the person or business connection within the territory of the
taxing State; and the situation within the State of the money or
property from which the taxable income is derived (see The Law
and Practice of Income Tax by Kanga and Palkhivala,
seventh edition, at p. 10). c
25. In the case of A.H. Wadia v. CIT reported in (1949)
17 ITR 63 the Federal Court held that so long as the statute
(Income-tax Act, 1922) selected some fact or circumstance
which provided some connection or nexus between the person
who is subject to the tax and the country imposing the tax, its D
validity would not be open to challenge on the ground that it is
extra-territorial in operation. In that case, the question which
arose for determination before the Federal Court was whether
Section 42( 1) of the 1922 Act, which brought within the scope
of the charging section "interest" earned out of money lent E
outside British India, but brought into British India as ultra vires /
the Indian Legislature on the ground that it had extra-territorial
operation. It may be stated that Section 9 of the 1961 Act
gathers in one place various provisions (which stood scattered
in the 1922 Act) under which income actually accruing to an F
assessee abroad is deemed to accrue in India. Section 42(1)
of the 1922 Act is similar to Section 9(1)(i) of the 1961 Act. It
was held by the Federal Court that Section 42(1) brings within
the ambit of the charging section (Section 4 of the 1922 Act)
income accruing or arising, directly or indirectly, under the four G
categories of income, viz., from business connection or
property or asseU source of income in India or through transfer
of capital asset in India or through moneys lent. It was held that
since the money lent was brought by the assessee into British
India, the transaction fell under one of the categories of income H
56 SUPREME COURT REPORTS [2009] 5 S.C.R.

A in Section 42(1), consequently the income therefrom was
deemed to accrue or arise in British India. It was held that once
an income came within one of the categories of income in
Section 42(1), the inc:ome arising out of the transaction came
under Section 42(1} as there existed a territorial connection
B between the person reiceiving income under the particular head
and India. It may be mentioned that Section 42(1) of the 1922
Act is similar to Section 9(1) of the 1961 Act which deems
certain categories of income to accrue in India.

26. Applying the above test, we are of the view that if the
C 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) (which is one
D of the heads of income). Section 9(1 )(ii) lays down that income
which falls under the head "Salaries", if it is earned in India, shall
be deemed to accrue or arise in India. In fact, Section 9
explains the expression "is deemed to accrue or arise to him
in India" used in Section 5(2)(b). Section 9 is not only a
E machim~ry 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.
Section 9 is, therefore, a typical example of a combination of
F a machinery provision which also provides for chargeability.
27. Lastly, on the question of extra-territorial operation of
the Income-tax Act, 1961, it may be noted that the 1961 Act
has extra··territorial operation in respect of the subject-matters
and the subjects which is permissible under Article 245 of the
G Constitution and the provisions are enforceable within the Area
where the 1961 Act extends through the machinery provided
under it.

28. On the question as to whether there is any inter-linking
H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 57
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]

of the charging provisions and the machinery provisions A
under the 1961 Act, we may, at the very outset, point out that
in the case of CIT v. B.C. Srinivasa Setty reported in (1981)
128 ITR 294 this Court has held that the charging section and
the computation provisions together constitute an integrated
Code. When there is a case to which computation provisions B
cannot apply at all, it is evident that such a case was not
intended to fall within the charging section. We may add that,
the 1961 Act is an integrated code and, as stated hereinabove,
Section 9(1) integrates the charging section, the computation
provisions as well as the machinery provisions. (see Section c
9(1)(i) read with Sections 160, 161, 162 and 163)

29. In the present case, it has been vehemently urged that
TDS provisions being machinery provisions are independent
of the charging provisions whereas as held by this Court in the
-l case of B.C. Srinivasa Setty (supra), the 1961 Act is an D
integrated Code. To answer the contention herein we need to
examine briefly the scheme of the 1961 Act. Section 4 is the
charging section. Under section 4(1 ), total income for the
previous year is chargeable to tax. Section 4(2) inter alia
provides that in respect of income chargeable under sub- E
section(1), income-tax shall be deducted at source whether it
is so deductible under any provision of the 1961 Act which inter
alia brings in the TDS provisions contained in Chapter XVll-B.
In fact, if a particular income falls outside Section 4(1) then TDS
provisions cannot come in. Under Section 5, all residents and F
non-residents are chargeable in respect of income which
accrues or is deemed to accrue in India or is received in India.
Non-residents who are not assessable in respect of income
accruing and received abroad are rendered chargeable under
Section 5(2)(b) in respect of income deemed by Section 9, to G
accrue in India. Section 9 deems certain categories/heads of
income to accrue in India has no application in cases where
income actually accrues in India. Likewise, Section 9 does not
apply in cases where income is received in India. Therefore, if
the income is not received in India, a non-resident would not H
58 SUPREME COURT REPORTS [2009) 5 S.C.R.

A be chargeable to tax 1..1pon it unless it accrues or is deemed to
accrue in India. Thu:s, a general charge of income-tax is
imposed by Section 4 and 5, and that general charge is given
a particular application in respect of non-residents by Section
9 which enlarges the ambit of taxation by deeming income to
B arise in India in certain circumstances. Under Section 9(1),
income is deemed to accrue in India if it accrues directly or
indirectly under five circumstances mentioned therein. To give
an example of as to h<>w the 1961 Act is an integrated Code
we may state that Sec:tion 9(1) explains the meaning of the
c words "deemed to accrue or arise in India" in Section 5(2)(b).
Section 9(1)(i) perfoimi; two functions:

I. It deems the above five categories of income to
accrue in India. The deeming provisions of this
clause
D
(a) apply to residents and non-residents alike;

(b) have no application where income actually
accrues in India or is received in India.
E Both these points have been noted above in
dealing with this section generally.
II. It specifies the categories of income in respect of
which a vica11ous liability is imposed by Sections
F 160 and 16·t on an agent to be assessed in
respect of a non-resident's income. In performing
this function, the clause
(a) applies to the income of non-residents alone;

G (b} specifies the categories of income in respect of
which the agont is vicariously liable even if the
income actually accrues in India or is received in
India.
H Examples showing inter-linking of various provisions of
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 59
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
the 1961 Act: A

(a) It may be noted that Sections 160(1)(i), 161, 162
and 163 are machinery sections. They do not affect
tlie incidence of taxation under Sections 4 and 5
which are the charging sections. Sections 160 and
,I
B
161 provide a machinery for collection of a charge
which is imposed in general terms elsewhere and
yet Sections 160 and 161 are the sections which
like Section 201(1) imposes a vicarious liability on
an agent to be assessed in respect of the income
of the principal. The liability is imposed under
c
Sections 160 and 161 in respect of the income of
non-resident principal and it is only in respect of the
income falling within Section 9(1) and not any other
income. Therefore, one has to read Section 9(1)
with Section 160 and Section 161 which are D
machinery sedions (See The Law and Practice of
Income Tax by Kanga & Palkhivala, eighth
edition., at pp. 1268 and 1269).

(b) Similarly, Section 40(a)(iii), quoted above, which E
finds place in Chapter IV (computation of business
......
income) inter alia states that any payment which is
chargeable under the head "Salaries", if it is
payable outside India or to a non-resident and if the
tax thereon is not deducted from such payment F
under Chapter XVll-B then notwithstanding the
entitlement of the assessee to claim deduction, the
same will be disallowed for such non-deduction of
tax at source.
30. The above examples show that the 1961 Act is an G
integrated code in which one cannot segregate the computation
... machinery from the collection and recovery machinery.

H
60 SUPREME COURT REPORTS [2009] 5 S.C.R.

A (ii) On the Scope c1f Section 192(1):

31. On behalf of the tax-deductor-assessee the basic
contention before us was that Section 192(1) was not
applicable as the Home Salary was paid by the foreign
company outside India dehors the contract between the
8
respondant herein and the expatriate(s). That, the contract
under which the homei salary was paid in foreign currency stood
executed outside India. That, the payment of home salary by
the foreign company abroad was not on behalf of or on account
of the tax-deductor-assessee (who has not claimed deduction
C for such salary in computation of its business income in India
under the 1961 Act), therefore, it was urged that there was no
obligation on the tax-deductor-assessee to deduct tax from the
Home Salary/special allowance(s) paid in foreign currency
abroad.
D
32. To resolve the controversy, we !leed to analyse Section
192(1). After going through the relevant provisions of Section
192 and Section 9(1 )(ii) with the Explanation thereto we are of
the view that Section 192 inter alia provides that any person
E responsible for payment of any income chargeable under the
head "Salaries" shall at the time of payment deduct income-
tax on the basis of the rates in force for the financial year. It is
true that the word "ag!~regate" does not precede the word
"income" in Section 192(1). However, in Section 192(1), the
F words used are "any income chargeable under the head
"salaries'1 shall at.the time of payment, deduct income-tax on
the amount payable. There is a marked similarity between
Section 192(1) and Section 40(a)(iii). The word(s} used in
Section 192 is not merely "salaries". The words used in Section
G 192(1) are "any income chargeable under the head 'Salaries"'.
This aspect is very important. Under the 1961 Act, as stated
hereinabove, there are different categories of income
enumerated in Section 9(1 ). One such income falls under the
head "Salaries" if earned in India (see Section 9(1)(ii)). Once
an income falls under Section 9(1), it comes in the category of
H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 61
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
income deemed to accrue or arise in India in terms of Section A
5(2)(b). This is one more example of the 1961 Act being an
integrated code. At this stage two aspects need to be
highlighted. Firstly, in Section 192(1), tax at source has to be
deducted on the amount payable. This is where the tax-
deductor-assessee has to estimate the income of the B
assessee-employee under the head "Salaries". This word
"payable" also finds place in Section 40(a)(iii). Secondly, one
has to note the effect of the Explanation to Section 9(1)(ii). Prior
to the insertion of the Explanation, the Gujarat High Court had
held in the case of PGNATALE (supra) that the words "earned c
in India" in Section 9(1)(ii) must be interpreted as "arising or
accruing in India" and not as "from services rendered in India".
Therefore, according to the Gujarat High Court, if the liability
to pay arose outside India and the amount became payable
outside India, Section 9(1)(ii) was not invokable. To offset the D
effect of the judgment of the Gujarat High Court, an Explanation
was inserted by which the expression "earned in India" stood
equated to "services rendered in India". Thus, according to
Kanga and Palkhivala on the The Law and Practice of Income
Tax, Section 9(1)(ii) inter a/ia provides for an arlificial place E
of accrual for income taxable under the head "Salaries" (see
seventh edition at p. 207). Section 9(1)(ii) thus enacts that
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 F
accrual of the salary being immaterial. Thus, Section 192(1) has
to be read with Section 9(1 )(ii). This is one more illustration to
show that the 1961 Act is an integrated code. In fact, if Section
192(1) is to be segregated from Section 9(1 )(ii) or from Section
40(a)(iii) then the very purpose of shifting the "accrual test" to G
the "earning test" by reason of insertion of Explanation, would
stand defeated. In this connection one more aspect may be
noted. Section 192(1) is the only section in Chapter XVll-B,
unlike other sections in that chapter, which requires deduction
of tax at source on estimation of income chargeable under the H
62 SUPREME COURT REPORTS [2009) 5 S.C.R.

A head "Salary". The1 act of "estimation" is similar to computation
of income. As stated above, the 1961 Act is an integrated
Code in which chargeability and computation goes hand in
hand. Thus, Sectic1n 192(1), which is a stand-alone section in
Chapter XVll-B, has to be read with Section 9(1)(ii).
B
33. From the above analyses two conclusions flow. Firstly,
it cannot be stated as a broad proposition that the TDS
provisions which are in the nature of machinery provisions to
enable collection and recovery of tax are independent of the
charging provisions which determines the assessability in the
C hands of the employee-assessee. Secondly, whether the Home
Salary payment made by the Foreign Company in foreign
currency abroad can be held to be "deemed to accrue or arise
in India" would depond upon the in-depth examination of the
facts in each case. If the home salary/special allowance
D payment made by the foreign company abroad is for rendition
of services in India and if as in the present case of M/s Eli Lilly
& Company (India) Pvt. Ltd. no work was found to have been
performed for M/s Ell Lilly Inc Netherlands then such payment
would certainly come1 under Section 192(1) read with Section
E 9(1)(ii). As stated above, the post-survey operations revealed
that no work stood p13rformed for the foreign company by the
four expatriates to thE~ joint venture company in India and that
the total remuneration paid was only for services rendered in
India. In such a case the tax-deductor-assessee was statutorily
F obliged to deduct tax under Section 192(1) of the 1961 Act.

(iii) On the Scope of Section 201(1) and Section 201(1A):

34. A perusal of Section 201(1) and Section 201(1A)
shows that both these provisions are without prejudice to each
G other. It means that the provisions of both the sub-sections are
to be considered independently without affecting the rights
mentioned in either of the sub-sections. Further, interest under
Section 201 (1A) is compensatory measure for withholding the
tax which ought to have gone to the exchequer. The levy of
H interest is mandatory and the absence of liability for tax will not
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 63
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.]
dilute the default. The liability of deducting tax at source is in A
the nature of a vicarious liability, which pre-supposes existence
of primary liability. The said liability is a vicarious liability and
the principal liability is of the person who is taxable. A bare
reading of Section 201 (1) shows that interest under Section
j 201(1A) read with Section 201(1) can only be levied when a B
person is declared as an assessee-in-default. For computation
of interest under Section 201 (1A), there are three elements.
One is the quantum on which interest has to be levied. Second
is the rate at which interest has to be charged. Third is the
period for which interest has to be charged. The rate of interest c
is provided in the 1961 Act. The quantum on which interest has
to be paid is indicated by Section 201(1A) itself. Sub-section
(1A) specifies "on the amount of such tax" which is mentioned
in sub-section (1) wherein, it is the amount of tax in respect of
which the assessee has been declared in default. The object
..j
D
underlying Section 201 (1) is to recover the tax. In the case of
short deduction, the object is to recover the shortfall. As far as
the period of default is concerned, the period starts from the
date of deductibility till the date of actual paymenf of tax.
Therefore, the levy of interest has to be restricted for the above
stated period only. It may be clarified that the date of payment E
by the concerned employee can be treated as the date of
actual payment.

(iv) On the Scoee of Section 271C read with Section 2738:
,;,. F
35. Section 271 C inter alia states that if any person fails
to deduct the whole or any part of the tax as required by the
provisions of Chapter XVll-B then such person shall be liable
to pay, by way of penalty, a sum equal to the amount of tax
.., which such person failed to deduct. In these cases we are
G
concerned with Section 271C(1)(a). Thus Section 271C(1)(a)
... makes it clear that the penalty leviable shall be equal to the
~
amount of tax which such person failed to deduct. We cannot
hold this provision to be mandatory or compensatory or
automatic because under Section 2738 Parliament has
H
64 SUPREME COURT REPORTS [2009] 5 S.C.R.

A enacted that penalty shall not be imposed in cases falling
thereunder. Section 271C falls in the category of such cases.
Section 2738 states that notwithstanding anything contained in
Section 271C, no penalty shall be imposed on the person or
the assessee for failure to deduct tax at source if such person
B or the assessee proves that there was a reasonable cause for
the said failure. Therefore, the liability to levy of penalty can be
fastened only on the person who do not have good and sufficient
reason for not deducting tax at source. Only those persons will
be liable to penalty who do not have good and sufficient reason
c for not deducting the tax. The burden, of course, is on the
person to prove such good and sufficient reason. In each of the
104 cases before us, we find that non-deduction of tax at source
took place on account of controversial addition. The concept
of aggregation or consolidation of the entire income chargeable
under the head "Salaries" being exigible to deduction of tax at
0
source under Section 192 was a nascent issue. It has not be
considered by this Co1Jrt before. Further, in most of these cases,
the tax-deductor-ass1:issee has not claimed deduction under
Section 40(a)(iii) in computation of its business income. This
is one more reason for not imposing penalty under Section
E 271C because by not claiming deduction under Section
40(a)(iii}, in some cases, higher corporate tax has been paid
to the extent of Rs. 906.52 lacs (see Civil Appeal No. 1778/06
entitled CIT v. The Bank of Tokyo-Mitsubishi Ltd.). In some of
the cases, it is undisputed that each of the expatriate
F employees have paid directly the taxes due on the foreign
salary by way of advance tax/self-assessment tax. The tax-
deductor-assessee was under a genuine and bona fide belief
that it was not under any obligation to deduct tax at source from
the home salary paid by the foreign company/HO and,
G consequently, we are e>fthe view that in none of the 104 cases
penalty was leviable under Section 271 C as the respondent in
each case has discharged its burden of showing reasonable •
cause for failure to deduct tax at source.

H
COMMISSIONER OF INCOME-TAX, NEW DELHI v. ELI 65
LILLY & COMPANY (INDIA) PVT. LTD. [S.H. KAPADIA, J.)
VI. Directions-cum-Conclusion: A

36. For the reasons stated hereinabove, we hold that the
TDS provisions in Chapter XVll-B relating to payment of
income chargeable under the head "Salaries", which are in the
nature of machinery provisions to enable collection and recovery 8
of tax forms an integrated Code with the charging and
computation provisions under the 1961 Act, which determines
the assessability/taxability of "salaries" in the hands of the
employee-assessee. Consequently, Section 192(1) has to be
read with Section 9(1)(ii) read with the Explanation thereto. C
Therefore, if any payment of income chargeable under the head
"Salaries" falls within Section 9(1)(ii) then TDS provisions would
stand attracted. In this batch of civil appeals, identification of
the recipient of salary is not in dispute. In our view, therefore,
the tax-deductor-assessee (respondent(s)) were duty bound to
deduct tax at source under Section 192(1) from the Home D
Salary/special allowance(s) paid abroad by the foreign
company, particularly when no work stood performed for the
foreign company and the total remuneration stood paid only on
account of services rendered in India during the period in
question. As stated above, in this matter, we have before us E
104 civil appeals. We are directing the AO to examine each
case to ascertain whether the employee-assessee (recipient)
has paid the tax due on the Home Salary/special allowance(s)
received from the foreign company. In case taxes due on Home
1 Salary/special allowance(s) stands paid off then the AO shall F
not proceed under Section 201 (1 ). In cases where the tax has
not been paid, the AO shall proceed under Section 201(1) to
recover the shortfall in the payment of tax.

37. Similarly, in each of the 104 appeals, the AO shall G
examine and find out whether interest has been paid/recovered
for the period between the date on which tax was deductible
till the date on which the tax was actually paid. If, in any case,
interest accrues for the aforestated period and if it is not paid
then the Adjudicating Authority shall take steps to recover H
66 SUPREME COURT REPORTS (2009] 5 S.C.R.

A interest for the aforestated period under Section 201 (1A).

38. For the reasons mentioned hereinabove, however, no
penalty proceedin1~s under Section 271 C shall be taken in any
of these cases as the issue involved was a nascent issue.
Accordingly we quash the penalty proceedings under Section
8
2"71 C.

39. Subject to what is stated above, the civil appeals filed
by the Department stand partly allowed with no order as to costs.

C G.N. Appeals partly allowed.