The income tax tribunal has rejected the claim of Marubeni India to allow tax paid on behalf of the employees as incentive to be adjusted as deduction.
Marubeni India, a wholly-owned subsidiary of Marubeni Corporation, Japan, is involved in international trading of items such as textiles, chemicals, energy and metal.
According to the tribunal order, the tax paid has been rejected as deduction since there is no contractual agreement in writing between Marubeni India and Marubeni Corporation, Japan for paying the taxes for the employees on the salary they receive in Japan.
Marubeni India waited for two years before making the tax payment. These employees were on the rolls of Marubeni Japan. However, their services were rendered to the firms Indian outfit, Marubeni India.
Tax analysts contend that even if the judgement pertains to a single case, it might impact such informal arrangements entered into by other foreign companies who have posted their employees from their headquarters to their wholly-owned subsidiaries in India.
The tribunal has held that the Japanese company should have deducted the tax in respect of salaries received by the employees outside India from the parent and paid to the Indian government.
This was not done for the assessment period 1996-1998 and the Indian company paid the taxes later under an arrangement with the income tax authorities.
The deduction has been claimed for the assessment years 1997-98 and 1998-99.
In the order the tribunal has also clarified that there was no contractual liability since the incentive in the form of taxes paid on the salary is not expended out of necessity or need to support the trade but for commercial expediency of the companys business.