Case Law Details
Director of Income-Tax Vs Sasken Communication Technologies Ltd. (Karnataka High Court)
The issue under consideration is whether the amount paid to the employees under the non-compete agreement is covered by the expression ‘salary/profits in lieu of salary’ or not? and If not then whether the TDS will be applicable or not?
In the present case, two employees was in the employment of M/s SNSL a subsidiary company of the assessee and were employed as Chief Executive Officer and Chief Operating Officer respectively. The subsidiary company merged with the assessee. The assessee, therefore, offered employment to the two persons, as they were in key strategic positions of the subsidiary company. The assessee filed the C.A. Certificate with the remitter bank with the endorsement that no tax is required to be deducted at source since remittance is towards consideration under the Non-Compete Agreement and is covered by Article 16(1) of the DTAA between India and USA. The assessing officer by an order held that agreements and the payment made thereunder to the two employees of the company were created for the purposes of avoiding payment of tax in India. Therefore, it was held that the amount of tax has to be deducted as quantified by taking assessee in default and interest under Section 201(1A) of the Act was levied.
High Court states that Non Compete Agreement prohibits the employee from joining any competitive business entity after termination of the employment, whereas, no such clause is available in Non Disclosure Agreement. It was further held that the employees who were occupying higher positions in the subsidiary companies and were in possession of vital and confidential information were required to be retained in the interest of the assessee for carrying on its business effectively. It was further held that the terms and conditions of the Non Disclosure Agreement are not exactly the same as the Non Compete Agreement. The tribunal recorded a finding that the transactions in question were not sham transactions. Further, the employees were rendering services outside India i.e., U.S. and payments were also made in U.S., Article 16 of DTAA applies and the same is taxable only in U.S.A. It was held that income in the hands of the employees is salary / profit in lieu of salary and it has to be treated as such and in view of Article 16 of DTAA, the same is taxable In U.S. It was inter alia held that where the payments are in nature of salary, the payer need not approach the appropriate authority under Section 195(2) of the Act. It was further held that amount paid to the employees of the assessee being in the nature of salary is not taxable in India in view of Article 16 of DTAA between India and United States and therefore, the assessee was not under an obligation to deduct tax at source. The assessee, therefore, cannot be deemed to be an assessee in default under Section 201(1) of the Act. It was also held that since, the assessee has not been held to be an assessee in default, therefore, the interest under Section 201(1A) of the Act is not leviable. Accordingly, the appeal was allowed.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
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