Payments made to Expatriate Employees from Overseas can be deducted from the Business Income of the Assessee though TDS is not deposited within time: Delhi High Court

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The Delhi High Court on today delivered a judgment, held that Payments in the nature of salary, allowance, perquisites etc., made to the expatriate employees from the head office of the Company situated overseas can be deducted from the Business Income of the assessee Company even the though TDS in respect of such payments is not deposited within the prescribed time. The highlights of the judgment are as follows.

The Appellant Assessee was a Banking Company named as ‘ANZ Grindlays Bank Ltd’ having its head office situated overseas. During the relevant FYs,i.e., 1984-85 to 1993-94, the Assessee was a non-resident banking company and its principal place of business was situated outside India. The Assessee also carried on banking business in India through its branches situated within the country. During this period, the assessee employed some of its employees from overseas to its branches in India for the business carried on in India. The remuneration paid to them by way of salary and perquisites were duly reflected in the Profits & Loss Account of the Books kept by the Assessee in respect of its operations in India. The Assessee also deducted tax at source on the remuneration payable to those expatriate employees in India and such TDS was deposited with the Indian Government.

In addition to all the remuneration said above, the employees also received some payments in the nature of salaries, allowances, and perquisites, etc., from the head office of the Bank. However, this was not shown in Assessee’s P& L A/c in respect to the operations in India. The Assessee neither claimed such payments as a deduction for the purposes of computing its income chargeable to tax in India nor deducted any tax under Chapter XVII B of the Act.

During the relevant period, some of the other non-resident assessees, who had employed expatriate employees in India, had also not deducted TDS on payments made to and/or for the benefit of such employees abroad on an erroneous understanding that payments made abroad were not subject to withholding tax in India. In order to clarify the position, the Central Board of Direct Taxes (CBDT) issued a Circular i.e. Circular No. 685 dated 17/20th June, 1994 to clarify that all payments made and perquisites provided to employees overseas for services rendered in India are taxable in India irrespective of the place of payments.

Accordingly, if the employees have rendered services in India, the employers are liable to deduct tax at sourceeven in respect of payment of salary, allowances, and perquisites paid and/or provided to such employees overseas. In order to encourage immediate voluntary compliance, CBDT had decided to not initiate some penalty proceedings under the Act in cases where the employer come forward to pay the entire tax amount with interest under s.192 of the Act before 31st July 1994. The Assessee paid the entire amount to the Income Tax Authorities in pursuant to the above Circular. After accepting the tax amount, the Commissioner of Income Tax informed the Assessee that there will not be any further penalty proceedings against them for the payments made from overseas to the employees in respect of which the amount was paid.

The assessments for the six assessment years from AY 1985-86 to 1990-91 stood concluded as on 28th July, 1994 and, thus, the Assessee could not claim any deduction on account of the payments made in respect of the said years. However, the Assessee’s appeal in respect of AY 1991-92 was pending before CIT(A) and the Assessee sought to claim a deduction of an amount of Rs.1,32,46,994/- in respect of payments made pertaining to the financial year 1990-91. However, this claim was rejected by the CIT(A) on the ground that such a claim could not be raised during the appellate proceedings and no deduction could be claimed under the Act.He doubted whether the entire tax due had been paid by the Assessee since the amount of tax paid would also be includable as income of the employees and, therefore, have the effect of increasing their income and consequently, the tax payable thereon. He further observed that it was possible that the salaries paid to the employees overseas were a part of the head “office expenses”. However, the claim was admitted by the Tribunal and observed that the CBDT Circular only gave immunity to the Assessee from penalty and prosecution but did not remove the disincentive under Section 40 of the Act.The Tribunal also referred to Section 40(a)(i) of the Act which expressly provided that no deduction would be allowed in respect of any interest, royalty, fees for technical services or other sums chargeable under the Act which is payable outside India and in respect of which no tax has been deducted and paid under Chapter XVII B of the Act.

The issue to be decided by the Court was that whether the amount paid by the Assessee in accordance with the CBDT Circular dated 685 dated 17/20 June 94 and Circular 686 dated 12.8.94 is permissible for deduction under section 40(a)(iii) of the Act r/w Article 7 of the Indo-UK Double Taxation Avoidance Treaty or not.

While deciding the case, the Court found that the TDS paid on the expenses claimed have been duly verified and the tax on the payments made which are chargeable under the head “Salaries” have been recovered by the Government. The only reason for denying the claim is non-deposit of TDS within the prescribed time. The TDS having been deposited, there is no impediment for Assessee to claim the related expense. The Court disagreed to admit that an absence of a provision similar to S. 40(i)(a) of the Act cannot be read as to disentitle an Assessee to claim a deduction even though it has complied with the condition under S. 40(iii)(a) of the Act.

However, the Assessee cannot claim a deduction for a period of six years – AY 1985-86 to AY 1990-91- even though the Assessee has paid the TDS on the expenses pertaining to said period because such deduction can be claimed in the year in which the Assessee deposits the Tax. Further, the Court also held that the Assessee can claim deduction on an expense that is not reflected in its profit and loss account for the relevant period.

Read the Judgment here.

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