In an important ruling on Wednesday, the Supreme Court said that MNCs should withhold taxes (Tax Deducted at Source) even if the salaries are paid outside India to the expat employees working in India. The judgement has serious implications for the multinational companies and their expat employees as the court has said that the TDS provisions can be extended beyond the geographical borders of India.

The SC, however, disposed off a batch of appeals by the income tax department saying that no penalty would be levied against the Japanese employers for the failure to withhold taxes because there was no willful default on the part of the Japanese companies. The appeals had come in after the case was lost in the High Court and the tax tribunal. The case was in relation to the Japanese companies and their withholding tax obligation towards the salaries they pay to the Japanese expatriates outside India.

The Supreme Court has also said that the observations made this case will not apply to the Hutchison Vodafone case. “The principle will not apply to the Vodafone case as it is an independent case. If this principle applies to Vodafone, then the government’s case against Vodafone becomes stronger,” said Mukesh Butani, partner, BMR Advisors, who played a key role in the cases at the tribunal level.

He also said “My pursuant discussions suggests that this was a move adopted by the counsel as they were unsure as to what the outcome of the court decision would be on the second (withholding tax) principle and that a specific application was made to the court for such qualification. I tend to agree with the theory since it is unusual for the court to pronounce a decision with such a qualification.”

Withholding tax obligation would apply even in situations where the salary had been paid overseas for the services rendered in India. According to Butani, though this is in correct position, some of the Japanese employers took the plea that since they are non residents and the salary was paid overseas, withholding tax obligations should not be fastened upon them despite the fact that such income was liable to tax, though, declared voluntarily.The court has given relief to various MNc such as Mitsui, Mitsubushi, Lurgi and Ericsson.

The department of revenue had launched investigations in 1999-2000 and pulled up Japanese companies on their expatriate staff based in India asking them to disclose their salaries. Post the salary disclosures, the revenue department levied penalties on them for non- voluntary disclosure.

Though the decision will not impact India companies, Butani said “for the foreign companies, whether they have a presence in India or not will have to enforce with holding tax obligation will have to implement withholding tax implication.”

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