Salary paid overseas to employees of foreign companies for services rendered in India will attract income tax. In a judgement on appeal filed by more than 30 Japanese companies operating in India, the Supreme Court on Wednesday ordered withholding of tax in such cases but has granted exemption to the companies from paying any penalty.

The Japanese companies, including Marubeni, Honda, Bank of Tokyo-Mitsubishi, have been fighting the issue with tax authorities for more than a decade. Eighty-two companies — including 57 Japanese — were slapped with income-tax notices amounting to around Rs 484 crore in 1998. At that time, certain quarters alleged the development was a deliberate harassment by the then National Democratic Alliance (NDA) government, following Japan’s opposition to the Pokhran II test, though similar notices were also issued to a host of non-Japanese companies.

The Supreme Court order, a written copy of which has not been released as yet, is likely to make it mandatory for all foreign companies operating in India to withhold income tax on salary paid to its employees for services rendered here even if they do not have any office or establishment in the country. “The court has confirmed that even if employees are non-residents, withholding tax liability will apply to them. We are still to examine the order,” said Mukesh Bhutani, partner, BMR Advisors.

The SC order came while deposing off a bunch of applications. Bhutani said the court did not levy penalty against the Japanese employer for failure to withhold tax on the grounds that such failure was not deliberate.

On being contacted, Prakash Chandra, director general, international taxation, said the case has been pending for appeal for some time and the exact import of the order would be known only after

the judgement is made

available.

Chandra, however, said tax authorities had taken the position that if services were rendered in the country, then the salaries paid for them were liable for taxation here.

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