TMI Blog2009 (3) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... eholding in HDX. The other 50 per cent. share holding in HDX was held by an Indian House. In the month of March, 1999, Deluxe Corporation USA (Deluxe) acquired 50 per cent. of the holding of the Indian business partner and made HDX as wholly owned subsidiary company and consequent to that, the Deluxe Corporation then restructured the management set up of HDX. On HDX becoming 100 per cent. subsidiary of Deluxe Corporation USA, a letter dated April 6, 1999, was given to the assessee by which the service of the assessee was terminated and the assessee was offered a limited period of employment to the same position of the chief executive officer of HDX. The tenure was up to August 1, 1999, or such earlier date as was to be determined by the chairman, HCL Deluxe N.V. As per clause 2 of that letter, other than the provisions for payment of extraordinary compensation for retention and severance as described in paragraphs 3 and 4, the gross salary and benefits paid during the period of employment were to be in continuation of the compensation and reimbursement as per the terms and conditions described in the appointment letter dated June 22, 1998. However, besides the regular compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded the amount of USD 10,00,000 as part of the salary and made addition of Rs. 4,34,36,250. Before the Commissioner of Income-tax (Appeals) the assessee, inter alia, submitted as under: (1) The assessee was regularly employed as per the appointment letter dated June 22, 1998. As per the said letter the assessee was to be paid compensation in the event of termination of his employment with HCL Deluxe N.V.(HDX) equivalent to 30 days' basic pay amounting to Rs. 1 lakh. The assessee however, did not receive any payment from HCL Deluxe N.V. (HDX) on April 6, 1999. Therefore, there was no payment received by the assessee which could come under the provisions of section 17(3) of the Act. (2) Sometimes in March, 1999, HCL Deluxe NV became a hundred per cent subsidiary of Deluxe Corporation of USA and came to be known as "HDX". It then severed the employment of the assessee by its letter dated April 6, 1999. However, by the same letter HDX also offered continued employment to the assessee and offered to reappoint him as the chief executive officer for a limited period up to August 1, 1999, or such earlier date as was to be determined by HDX. HDX offered to pay the assessee the same remu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not also render any services. There was neither termination of employment of the assessee nor modification in the terms of appointment of the assessee. Deluxe Corporation was not the employer or ex-employer of the assessee. Deluxe Corporation did not pay the extraordinary compensation amount of USD 5,00,000 as compensation for termination of employment or modification of terms of employment of the assessee. Therefore, the provisions of section 17(3) were not applicable and the payment of USD 5,00,000 received by the assessee was not chargeable to tax under section 17(3) of the Act. (9) Deluxe Corporation paid USD 5,00,000 to the assessee on May 21, 1999 outside India by credit to the Singapore Globe Fixed Deposit Account of the assessee with Citi Bank, Dubai branch. The FDR for USD 5,00,000 matured on August 24, 1999 and the amount of USD 3,00,000 equivalent to INR 1,30,53,700 was transferred to his savings account No. 5-022937-008 with Citi Bank, New Delhi on August 25, 1999. The assessee reinvested USD 2,00,000 in the four fixed deposits of USD 50,000 each. These fixed deposits got matured on September 14, 1999. On maturity the proceeds of the FDRs equivalent to INR 87,00, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity to HDX and make disclosure of the material facts and HDX rejected the opportunity. (13) The assessee was required to assign to HDX or HDX subsidiary designated by HDX, all rights, title and interest in all inventions, discoveries and ideas and all other work products related to the business of HDX and its subsidiaries which the assessee conceived, reduced to practice, reduced to writing or other storage media, or otherwise created during his employment with HDX or at any time within one year thereafter. The assessee was also required to execute such additional assignments and documents as HDX determined to be necessary or desirable to sell, assign, transfer, confirm or otherwise perfect such rights in and to HDX or its subsidiaries. (14) The assessee was required to give up all claims against HDX and against Deluxe and their respective subsidiaries and each of their respective directors, officers, employees and representatives. The assessee had to agree not to commence any law suit or other legal proceeding or file or otherwise assert any complaint or other demand against the released parties based on any claim. The assessee in brief submitted that the extraordinary co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of transition and reconstructing of the company after being taken over by the Deluxe Corporation, USA. Therefore, as per clause 4 of the letter the assessee was required to help the management in selection, appointment, orientation and transition of the successor of the chief executive officer of the company. The assessee was also required to personally introduce such persons to the personnel of HDX and all significant suppliers and customers known to the assessee. Therefore, the assessee was also required to render some extraordinary services during this period other than normal functioning as chief executive officer of the company. Hence, the whole amount which was received by the assessee amounting to USD 10,00,000 could not be said to be attributable exclusively to the restrictive covenants, non-compete or assignments of the rights clauses. Similarly all the amounts could not be attributed towards salary only as has been held by the Assessing Officer ignoring various clauses of the letter. Both the Assessing Officer and the assessee have taken extreme views on this receipt of extraordinary compensation. He further observed that the appropriation of the amount was requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x being in the nature of non-compete fee. The payment was made for acceptance of negative covenants in the letter dated April 6, 1999. However, the Assessing Officer had treated the amount of USD 10,00,000 liable to tax treating the same as part of the salary. He further submitted that the learned Commissioner of Income-tax (Appeals) has accepted part of the payment as not liable to tax. The assessee was reappointed by HDX, on terms and conditions enumerated in the letter dated April 6, 1999. Therefore, the employment of the assessee was governed by new terms and conditions of employment. The amount of USD 10,00,000 was paid by Deluxe Corporation Inc. USA who was not an employer of the assessee. The amount was paid to induce the assessee for accepting negative covenants. Therefore, any sum paid for inducing a person is not for the services rendered by the assessee. The amount of USD 5,00,000 was paid before the joining and therefore, no services were rendered by the assessee. Therefore, the amount of USD 5,00,000 was joining bonus and could not form part of salary income since the services of the assessee did not commence before the payment of USD 5,00,000 was made. The assessee un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the assessee for providing assistance during the transition period for which the assessee had to discharge several responsibilities. Therefore, the first payment of USD 5,00,000 is for services rendered liable to be assessed as part of salary. As regards the second part of payment it has to be decided whether it is a case of fresh appointment or not. Since it is a case continuation of employment, the amount paid on August 1, 1999, is also part of salary. Referring to restrictive clauses it has been submitted that clause 6 of the letter dated April 6, 1999, is a normal feature of any appointment/employment. Clauses 7, 8, 9 and 10 are normal conditions in respect of merger/demerger. He placed reliance on the decision of Income-tax Appellate Tribunal Delhi Bench "C" in the case of S. Harishanker in I.T.A. No. 2822(Del)/2004 for the assessment year 1999-2000 dated April 4, 2008. The learned authorised representative for the assessee replying to the arguments advanced by the learned senior Departmental representative, submitted that it is a case of reappointment. The purpose for which the amount was paid has to be seen. The payment was made by the US company Deluxe Corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Thus, the assessee though appointed as the chief executive officer of HCL Deluxe NV, was liable to be transferred not only to the offices of the company, but also to subsidiaries/group companies whether existing or to be set up globally. The appointment letter dated June 22, 1998, was signed by the chairman and chief executive officer of Deluxe Corporation. Since the assessee served on the strength of this appointment letter as the chief executive officer of HCL Deluxe NV with effect from September 1, 1997; it has to be taken that the chairman of Deluxe Corporation had authority to issue such appointment letter. Thus on combined reading of paragraphs 2 and 4 one may find that on expiry of probation period of 12 months, i.e., as on August 31, 1998, he became a permanent employee of the HCL Deluxe NV. (ii) Paragraph 3 of the appointment letter provides that in the event of resignation or termination of the services either side will have to give 30 days notice or basic salary in lieu thereof. Thus failure on the part of either party, the basic salary of 30 days was to be paid by the defaulting party to the other party. Paragraph 5 of the letter deals with service rules and vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities shall render you liable for appropriate disciplinary action." (iv) Paragraph 8 of the appointment placed restrictive covenants for engaging in other gainful or commercial employment part time or full time directly or indirectly, simultaneously as long as he was employed with HCL Deluxe NV. The relevant paragraph is reproduced as under: "8. You are required not to engage yourself in any other gainful or commercial employment, business, part-time or full time, directly or indirectly simultaneously as long as you are employed with the HCL DELUXE N.V. or engage yourself directly or indirectly in any other profitable business connected with the dealings or activities of the company in any way. Any action to the contrary would render your services liable for termination notwithstanding any other condition in the appointment letter." (v) As per paragraph 9 the assessee was to retire from service on superannuation at the age of 55 years or earlier in case he was found physically/mentally unfit to work any longer or for continued ill health as certified by the medical practitioner nominated by the company. Paragraph 10 of the said letter specifies the place of posting at N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ou, HDX will make an extraordinary compensation payment to you in the amount of USD 500,000 payable on your final day as an employee of HDX. However, should you choose to leave prior to August 1, 1999 (or such earlier termination date as I specify), you will not be entitled to receive, and HDX shall have no obligation to make, this final payment. 5. In the event of your resignation from the employment of HDX prior to August 1st or an earlier departure date set by me, you will be required to give at least 30 days advance written notice. 6. For the period of three years and four months from the date of this letter, you are required not to divulge, communicate or pass on any confidential information of HDX or Deluxe or any of their respective subsidiaries to any person who is not in the employment of HDX or Deluxe or any of their respective subsidiaries and who does not have a need to know such information to perform the duties of his or her position. 7. For the period of one year and four months from the date of this letter, you are required not, directly or indirectly (which shall include any actions taken on behalf of any third party), to recruit, hire or discuss employment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainful or commercial employment, business, part-time or full time, directly or indirectly simultaneously as long as you are employed with HDX. 13. Your failure to comply with in all material respects with the service rules and regulations and applicable statutes of or affecting HDX, or its policies respecting misconduct, discipline and other similar matters, as the same may be in force, introduced or amended from time to time, or your failure to comply in all material respects with the terms and conditions of this appointment letter may, upon determination by me, in my sole discretion, result in the termination of your employment; in such event your termination shall be deemed to be a termination 'for cause' and in such event you shall not be entitled to receive and HDX shall have no obligation to pay or provide any unvested benefits described in this appointment letter including, without limitation, the extraordinary compensation payment described in paragraph 4. In the event of a timely and reasonable determination by me of your failure to comply in all material respects with the provisions of paragraph 6, 7, 8, 9, or 10 after the termination of your employment with HDX, if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and thereafter, effective as of the date of your termination of employment by HDX, excepting, in either case, that the said release shall not release or discharge HDX from any obligation to make any payments due to you under this appointment letter. Further, this release shall not affect any claims that you could have made under any welfare benefit plan, such as health or life insurance. For avoidance of doubt, you expressly are hereby releasing any claim with respect to options or any other stock-based or cash-incentive compensation and any retirement or other, similar post-employment benefits except in the case of superannuation allowance as expressly provided herein. Please sign the duplicate copy of this appointment letter and return it to me as your acceptance of the appointment and its terms and conditions. Thank you for your many accomplishments to date, Ravi, and for your continuing support as HDX becomes a wholly-owned division of the Deluxe Corporation. I look forward to continuing warm relations between HDX and me, and yourself, and wish you the very best in your next career step. Yours Sincerely, Sd./- Gus Blanchard Chairman, HCL-Deluxe N.V. Accepted: Sd./ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessor chief executive officer, including personally introducing such person to personnel of HDX and all significant suppliers and customers known to him. However, the management imposed certain conditions to be observed by the assessee. In a situation the assessee sought to choose to leave prior to August 1, 1999 or such earlier termination date as specified by the management, the assessee was not entitled to receive final payment of USD 5,00,000. The earlier termination would have arisen had the assessee violated the terms and conditions enumerated in paragraphs 6, 7, 8, 9 and 10 of the letter dated April 6, 1999. Paragraph 13 describes conditions for earlier termination in two situations. The first relates to failure to comply with in all material aspects with the service rules and regulations and applicable statutes of or affecting HDX, or its policies respecting misconduct, discipline and other similar matters. The second relates to your failure to comply with in all material respects with the terms and conditions of the appointment letter dated April 6, 1999. In both the situations his termination was deemed to be for "right cause" and the assessee was not entitled for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not prohibit him to recruit employees in IT field or otherwise if he intended to start business on his own or on behalf of third person. Professional ethics also require that one should not indulge in such activities on leaving an organization after having served the same. This is a general condition of any such agreement. (c) The provisions of paragraph 8 require the assessee for the period of one year and four months from April 6, 1999, not to accept any interest in any project, program or venture, or any commission, finder's fee or other compensation in connection with any project, program or venture involving HDX or its subsidiaries in which he was engaged in the planning or implementation during his employment with HDX. The assessee has not been debarred in perusing any other program or project etc. Income earning capabilities are not in any way affected by the provisions of this paragraph. The conditions imposed are normal conditions of any contract between the two parties. The business interests of HDX have not been protected at the cost of the assessee by restricting him to exploit his tenants and capabilities. (d) The provisions of paragraph 9 of the appointment letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the restrictions placed on the assessee do not have any fetters on capabilities of the assessee from gainful engagement in any form. The interests of the employer company or its subsidiary companies have been safeguarded without affecting the income earning capabilities of the assessee by incorporating general restrictive conditions. Such restrictive conditions are generally incorporated in agreements with the employees holding important position in the organisation. Under paragraph 6, the assessee has to maintain secrecy of confidential information of the group companies of employer for a period of three years from April 1, 1999. Paragraphs 7, 8 and 9 as discussed above imposed restrictions of general nature not detrimental to the interest of the assessee only for a period of one year from August 1, 1999. It is not a case where the assessee entered into an agreement refraining himself from taking up any competitive employment or/assignment which led to the grant of extraordinary compensation. Therefore in our considered view the learned Commissioner of Income-tax (Appeals) was not justified in holding that 50 per cent. amount was relatable to restrictive covenants. We, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter, and (b) after your termination of employment, arising or accruing during the period commencing on the date of this letter and thereafter, effective as of the date of your termination of employment by HDX, excepting, in either case, that the said release shall not release or discharge HDX from any obligation to make any payments due to you under this appointment letter. Further, this release shall not affect any claims that you could have made under any welfare benefit plan, such as health or life insurance. For avoidance of doubt, you expressly are hereby releasing any claim with respect to options or any other stock-based or cash-incentive compensation and any retirement or other, similar post-employment benefits except in the case of superannuation allowance as expressly provided herein." On a careful reading of definition of "claims" for the purposes of the appointment letter dated April 6, 1999, one may find that word "claims", inter alia, include any rights the assessee have or may have.... to any compensation, reimbursement or other form of relief from the released parties whether or not he knew about those rights, arising out of his employment with HDX and his termi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed April 6, 1999 issued by the employer. We have earlier examined the terms and conditions of the letter dated April 6, 1999, terminating the services of the assessee and have held that the payment has been made for the termination of the employment. Hence this contention of the assessee is also rejected. From the above discussion it follows that the payment of USD 10,00,000 was for termination of services with HDX. Compensation for loss of employment is a capital receipt under the general law, but sub-clause (i) of section 17(3) brings to charge as profits in lieu of salary any compensation due or received from an employer or former employer at or in connection with the termination of his employment or modification of its terms and condition relating thereto. The payment of USD 5,00,000 on signing of the letter dated April 6, 1999 and USD 5,00,000 on August 1, 1999, will fall under the provisions of section 17(3)(i) of the Act. Our view is supported by the decision of the hon'ble Karnataka High Court in the case of CIT v. P. Surendra Prabhu [2005] 279 ITR 402 wherein it has been held that: "Clause (3) of section 17 of the Act provides an inclusive definition of 'profits in lie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause of the termination of the employment in terms of the letter dated April 6, 1999. Therefore, the payment of USD 10,00,000 received by the assessee is chargeable to tax as profit in lieu of salary under section 17(3)(i) of the Act. The decisions relied upon by the assessee in the case of CIT v. Shyam Sundar Chhaparia [2008] 305 ITR 181 (MP), Rohitasava Chand v. CIT [2008] 306 ITR 242 (Delhi), and the Special Bench decision in the case of Saurabh Srivastava v. Deputy CIT [2008] 300 ITR (AT) 113 (Delhi); [2008] 111 ITD 287 (Delhi) are distinguishable on the facts and are of no help to the assessee. In these cases the assessee was paid non-compete fee whereas in the case before us the payment has been made for termination of services. Therefore, the decisions relied upon by the assessee are not applicable. In view of the above, we are of the considered view that the learned Commissioner of Income-tax (Appeals) was not justified in treating the part of the payment towards restrictive covenants. We, therefore, set aside the order passed by the learned Commissioner of Income-tax (Appeals) and restore the order of the Assessing Officer. As regards the assessee's appeal, as held abo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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