2017 (12) TMI 1066 - HC - Income Tax

Applicability of provisions of section 195A - Petitioners as employees deputed by the Consultant, returned their income received in India and showed the tax component paid by the KSEB as income from other sources - Held that - In the present case the assesses were in India for employment in a project, as deputed by the Consultant. The assesses were, hence, in the employment of the KSEB and as per the consultancy agreement the salary was payable by the Consultant and the income-tax by the KSEB. Obviously, the salary of the employees deputed by the Consultant was included in the consultancy charges and the salary and income-tax were both from the KSEB, in whose project the assesses were employed. C.W. Steel (1971 (8) TMI 68 - KERALA High Court) is more on point, in interpreting the definition of salary in the Act, then, which inter alia included perquisites; which, by an Explanation, included any payment made by the employer in satisfaction of an obligation of the employee; which, but for the payment, would have been payable by the employee. Section 195A brings in the same effect, the absence of which prompted the Hon ble Supreme Court in Emil Webber 1993 (2) TMI 1 - SUPREME Court to direct treatment of the tax payment as income from other sources . Question of law raised to be answered in favour of the revenue and against the assessee on a different reasoning than that given by the Tribunal. We are told that in many of the assessment orders the computation has not been properly made. The Assessing Officer would, hence, employ Section 195A and compute the amounts properly within a period of two months from the date of receipt of the certified copy of this judgment. The assessees are said to have paid up the amounts already. Only if there is a balance due, the same would have to be satisfied by the assessee or its agent.

Summary

Issues:
Interpretation of Section 195A of the Income Tax Act, 1961 in the context of a consultancy agreement between a foreign national employee, a Consultant, and the Kerala State Electricity Board (KSEB).

Analysis:

1. Application of Section 195A of the Act:
The primary issue in this case revolves around the application of Section 195A of the Income Tax Act, 1961. The dispute arises from the treatment of tax paid by the KSEB on behalf of foreign national employees deputed by a Consultant. The Assessing Officer added the tax paid by KSEB to the salary of the employees, resulting in a tax liability for the foreign nationals. The Tribunal upheld the order, stating that the tax liability was borne by the same entity paying the salary, contrary to the argument raised by the assesses that Section 195A applies only when both salary and tax are paid by the employer. However, the High Court disagreed with the Tribunal's interpretation, emphasizing the clear contractual arrangement where the salary was paid by the Consultant and the tax by the KSEB.

2. Precedents and Legal Interpretation:
The High Court delved into legal precedents to support its decision. It referenced Commissioner of Income Tax v. C.W. Steel, highlighting the concept that income tax paid by the employer is considered part of the employee's income. The judgment emphasized that the total salary includes both the salary paid and the tax amount, leading to the inclusion of tax paid in the computation of income. Additionally, the Court discussed the case of Emil Webber, where tax paid directly by the employer was treated as "income from other sources" due to the absence of a specific provision like Section 195A at that time.

3. Interpretation of Employment Arrangement:
The Court analyzed the consultancy agreement between the parties to determine the nature of the employment relationship and the financial obligations. It noted that the salary and tax were distinct responsibilities of the Consultant and the KSEB, respectively, as outlined in the agreement. The Court rejected the assesses' argument that Section 195A applies only when both components are paid by the same entity, asserting that income should be assessed based on the recipient. The judgment aligned the case with C.W. Steel to interpret the definition of 'salary' under the Act, emphasizing that perquisites, including tax payments by the employer, form part of the employee's income.

4. Decision and Directions:
Ultimately, the High Court ruled in favor of the revenue and directed the Assessing Officer to recalculate the amounts within two months, applying Section 195A appropriately. The Court clarified that the assesses would be liable for any balance due after the reassessment. The judgment concluded by ordering the Income Tax Appeals in favor of the revenue, without imposing any costs on either party.

In conclusion, the High Court's detailed analysis of the contractual terms, legal precedents, and the application of Section 195A underscores the importance of correctly interpreting tax liabilities in employment arrangements involving foreign nationals. The judgment provides clarity on the inclusion of tax payments in the computation of income and highlights the significance of contractual obligations in determining tax responsibilities between parties involved.