COMMISSIONER OF INCOME-TAX, NEW DELHI vs. M/S ELI LILLY & COMPANY (INDIA) PVT. LTD.

CIVIL APPEAL No. 5114/2007Supreme Court[2009] 5 S.C.R. 2025 March 2009Bench: 2 JudgesAuthor: S.H. KAPADIA, AFTAB ALAM47 pages
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What were the facts?

The appeals by the Revenue (Commissioner of Income-Tax) challenged the decision concerning the deductibility of Tax Deducted at Source (TDS) under Chapter XVII-B of the Income Tax Act, 1961, on 'Home Salary' paid by a foreign company to expatriate employees for services rendered in India. The assessee, M/s Eli Lilly & Company (India) Pvt. Ltd., was the tax deductor. The core issue revolved around whether TDS provisions, considered machinery provisions for tax collection, were independent of charging provisions determining the assessability of 'Salaries' in the hands of the employee. The Supreme Court considered 104 civil appeals related to this matter, involving the assessment years not explicitly stated but implied to be prior to 2009.

What did the Supreme Court hold?

The Supreme Court held that the TDS provisions in Chapter XVII-B, relating to the payment of income chargeable under the head 'Salaries', are not independent but form an integrated code with the charging and computation provisions of the Income Tax Act, 1961. These provisions collectively determine the assessability and taxability of 'Salaries' in the hands of the employee-assessee. Consequently, Section 192(1) must be read in conjunction with Section 9(1)(ii) and its Explanation. If income chargeable under the head 'Salaries' falls within Section 9(1)(ii) (i.e., earned in India), then TDS provisions are attracted. The Court directed the Assessing Officer (AO) to examine each of the 104 cases to ascertain if the employee-assessee had paid the tax due on the 'Home Salary' or special allowances received from the foreign company. If taxes were paid, the AO was not to proceed under Section 201(1). If taxes were not paid, the AO was to recover the shortfall. Regarding interest under Section 201(1A), the AO was directed to ascertain if interest had been paid/recovered for the period from the date of deductibility to the date of actual payment and to recover it if not paid. Crucially, penalty proceedings under Section 271C were quashed in all cases, as the issue was considered nascent and the respondents had discharged their burden of showing reasonable cause for failure to deduct tax at source. The Court noted that in many cases, the tax deductor had not claimed deduction under Section 40(a)(iii), thereby paying higher corporate tax, and in some cases, expatriate employees had paid taxes directly.

What were the issues?

1. Whether the TDS provisions in Chapter XVII-B of the Income Tax Act, 1961, which are machinery provisions for tax collection, are independent of the charging provisions that determine the assessability of income under the head 'Salaries' in the hands of the employee-assessee? Assessee's Contentions: The judgment does not explicitly record arguments made by the assessee. However, the outcome suggests the assessee likely argued that the TDS provisions should be read in conjunction with the charging and computation provisions, and that penalties should not be levied due to the nascent nature of the issue and reasonable cause. Revenue's Contentions: The Revenue contended that TDS provisions are machinery provisions to enable collection and recovery of taxes and are independent of the charging provisions. They likely argued for the strict application of TDS provisions and the consequential liabilities for non-deduction, including interest and penalties.

Which sections of the Income-tax Act were involved?

Section 192(1),Section 9(1)(ii),Section 5(2)(b),Section 4,Section 201(1),Section 201(1A),Section 271C,Section 273B,Section 40(a)(iii),Section 15,Section 160(1)(i),Section 161,Section 162,Section 163

AI-generated summary — verify with the full judgment below

(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 E Adjudicating Authority.

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

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