Foreign companies operating in India must deduct TDS (tax deducted at source) even on salaries paid abroad to their expatriate employees for services rendered in India, the Supreme Court has ruled.
The judgment has serious tax implications for multinationals, which hitherto were taking the plea that no tax was deducted on home salary, with the apex court ruling that TDS provisions can be extended beyond the country's borders in the case of salaries.
A bench headed by Justice S H Kapadia said: "We are of the view that if the 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. . ."
The court set aside high court verdicts that held that non-resident companies were not under statutory obligation to deduct TDS on home salaries paid to their expats in foreign currency under Section 192 of the Income Tax Act, 1961.
On the question of levying penalty, it said that the penalty cannot be imposed on these foreign companies, mainly Japanese, for failing to deduct TDS on the portion of salaries paid in their home countries to their expat employees working in India.
