9911796707
TMI Blog2011 (2) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted tax before remitting the amounts under consideration. He therefore, issued notices calling for information as well as asking SCTL to show cause as to why it should not be treated as an 'assessee in default' in terms of provisions of section 201(1) of the IT Act. The assessee submitted the following details; "The payees i.e Mr M.S Kumar & Mr Kevin Koenig both had entered into employment with M/s Sasken Network Systems Ltd.,(SNSL) on 01-04-2004. The SNSL is fully owned subsidiary of the assessee company i.e. SCTL. Prior to joining M/s Sasken group, both the payees were working for M/s Lucent Technologies, USA and after joining M/s SNSL, they worked as Chief Operating Officer and Chief Executive Officer of M/s SNSL. On 31-03-2005 they were offered employment by M/s SCTL as the Vice President and Head (Networks Business Unit) and President, based in USA. Mr.Kumar, accepted the offer on the same day, while Mr.Koenig accepted the offer on 23-05-2005. While joining the SCTL both the payees signed the offer of employment in token of acceptance of the same. On joining the employment of SCTL, all its employees are expected to sign an 'Non-disclosure agreement' (NDA in short) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t employees. He held that since no independent verification is available, M/s SCTL has only its word to prove that the agreements were signed on the days they were supposed to have been signed and not later i.e after commencement of the inquiry in this case. He also held that the terms and conditions of the non-compete agreements are covered by the NDA which in fact every employee of SCTL is expected to sign and therefore, the non-compete fees is not required to be paid to the employees. He also observed that even if the non-compete fee is payable, then the non-compete agreement (NCA in short) is to see that the employees do not join any other employer whose business is substantially similar to or competitive with the business of M/s Sasken Group. He observed that the companies which qualify such competitiveness are M/s Wipro, TCS, Infosys, Flextronics, Mahindra British Telecom, Teleca & Mindtree which are all domestic companies and operate out of, India. Thus, he held it to be the income arising only in India which is the place where NCA would be required to come in to operation and therefore, income arises in India and is chargeable to tax in India. He also held that it is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to retain them during their transition from M/s SNSL to the rolls of assessee by recognizing their contributions and at the same time protecting its interest in the eventuality of their resigning from the job with the assessee. It was submitted that for this very reason, the Non-compete agreement was entered into and certain payments were made in pursuance of such agreements at the time of entering into the contract of employment with these employees. 4.1 As regards the AO's finding that no such agreement was entered into with any other employees and the Non-compete agreement need not be entered into with all the employees, it was submitted that the assessee would be the best person to decide whether to enter into such agreements with whom and the quantum of payment. The assessee has also contended that such payments may be made at any time and there is no prescription of law that such payments have to be made only at the beginning of the employment and the assessee had claimed that there was no discrepancy about the signing of the documents and even if there were some discrepancies they would not by themselves invalidate the agreements. As regards the AO's observation that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement from the view point of both the Act and the DTAA. He also held that the assessee has not been able to furnish copies of the income-tax returns of these two employees filed in the USA. He rejected its claim that these payments are taxable only in USA. Therefore, he held that these payments would be covered Under Article 23(3) of DTAA and these represent income arising from India and tax ought to have been deducted at source before making the payments. He therefore, confirmed the findings of the AO that the assessee is 'the assessee in default' u/s 201(1) of the IT Act and also liable for interest u/s 201(1A) of the IT Act. 4.3 Aggrieved, the assessee is in appeal before us. The learned counsel for the assessee Shri Padamchand Khincha, while reiterating the submissions made before the authorities below submitted that both the employees were initially working with M/s Lucent Technologies, USA before joining the subsidairy of the assessee company i.e. M/s SNSL. He submitted that both of them were appointed in the key and strategic positions as Chief Executive Officer and Chief Operating Officer and to incentivise their involvement with the company, it was agreed that apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpt to secure and protect the business of the assessee. As a consideration for such agreement, a consideration of Rs. 2,46,53,770/-each was agreed upon and paid to the employees in USA and no tax was deducted at source as the impugned payments were not chargeable to tax in India by virtue of Article-16(1) of the Indo-US Treaty. As regards the nature of payments the learned counsel for the assessee submitted that the two persons to whom the payments were made were the employees of assessee group and therefore, the payment is said to constitute one of the following; 1. Compensation at the time of termination from the subsidiary company; 2. Inducement for joining the employment of the assessee i.e. signing or joining bonus 3. Incentive in the course of employment but attaching a transition event. 4.4 He submitted that the above payments would partake the nature of salary or profits, in lieu of salary u/s 17(3) of the IT Act and should be charged to tax under Chapter-IVA under the head 'salaries'. As regards the quantifying of amount of compensation, he submitted that a discounted cash flow method was adopted, as the estimated profits for the next five years was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , he contended that the payments under Non-compete agreement cannot be taxed as business income u/s 28(va) of the IT Act. He submitted that under the Treaty between India and the USA, business income would be chargeable to tax only on the existence of a permanent establishment in India but as they do not have any permanent establishment in India, the payments were not taxable as business income. He submitted that as per Article-16, of Indo-US Treaty, the salaries are taxable in the countries of employees and undisputedly, the two employees are the residents of USA and therefore, the payments were not taxable in India. He also submitted that the payments fall under Article-16, and not fall under Article-23, of the Indo-US Treaty for taxation of other income, because any residuary head of income such as u/s 56 of the IT Act can be invoked only when an item of income is not chargeable to tax under any other heads of income. For this proposition, he placed reliance upon the following cases; 1. CIT v. Smt. T.P. Sidhwa [1982] 133 ITR 840/[1981] 6 Taxman 91 (Mum.) 2. Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428 (SC) and 3. CIT v. D.P. Sandu Bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373 and also extracts from the decision of the Tribunal in the case of Wipro Ltd. v. ITO [2005] 92 TTJ 796/94 ITD 9 (Bang.), Essar Oil Ltd. v. Dy. CIT [2006] 102 TTJ 614/5 SOT 669 (Mum.) and that of the Hon'ble Karnataka High Court in the case of VDO Tachometer Werke v. CIT [1979] 117 ITR 804 (Kar.). 5.2 From these documents, the learned counsel for the assessee tried to demonstrate his point that the payments made to the employees of the assessee company are not taxable under the DTAA between India and USA, which fall under the term of salary as defined under Article-16 of DTAA and the salary is taxable in the place of residence of the employees where the services are rendered. 6. On the other hand, the learned DR strongly supported the orders of the authorities below and submitted that both the authorities have considered the nature of payments extensively and the necessity of payments and also the taxability of the said payments in India. She submitted that the CIT(A) has extensively brought out in his order that the clause of the Non-disclosure agreement and the Non-compete agreement are almost one and the same and the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the rate as prescribed or for non-deduction of tax at source and that the duty of the payer ends here only and he is not required to examine and look into other aspects beyond this like whether the payer received the services from the non-resident to whom such payments were made or from some other person though the nonresident, whether such receipt in the hands of the recipient nonresident would be his income or part of it would be his income on which he is liable to pay tax. The payer is not expected to step into the shoes of the AO for examining whether the receipts in the hands of the recipient are income or not, whether he is liable to pay tax thereon or not. In case the assessee feels that the tax is not to be deducted at source or is required to be deducted at lower rate, then it is required to obtain a certificate from the AO for non-deduction or short deduction of tax at source. 3. CIT v. Samsung Electronics Co. Ltd. [2009] 185 Taxman 313 (Kar.), wherein it was held that section -195 is neither a charging section nor a section providing for determination of tax liability of non-resident recipient. The resident assessee can only be relieved from the obligation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, we find that it is undisputed that the two employees i.e. Mr. M.S.Kumar and Mr.Kevin Koenig were in the employment of M/s SNSL with effect from 01-04-2004 as Chief Executive Officer and Chief Operating Officer of M/s SNSL respectively. On the merger of subsidiary company of the M/s SNSL with the assessee company (SCTL) on 01-04-2005, the subsidiary company i.e. M/s SNSL ceased to be in existence. Therefore, it is imperative on the part of M/s SCTL to have offered employment to these two persons on 31-03-2005 as they were in key and strategic positions of M/s SNSL. Mr. Kumar accepted the offer of employment with M/s SCTL on 31-03-2005, while Mr.Kevin Koenig accepted the offer on 23-05-2005, but he joined the organization on 01-07-2005. The Non-compete agreements were allegedly entered into on 02-05-3005 and the payments were made on 31-05-2005. Thus, it can be seen that these two persons ceased to be employees of M/s SNSL with effect from 31-03-2005 and on acceptance of offer of employment, they became employees of M/s SCTL from the date of their acceptance. While there can be no quarrel with regard to the employment of Mr.Kumar with effect from 01-04-2005 and signing of Non-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpete agreement The assessee has filed before us a paper book containing the copies of the employment contracts between M/s SCTL and Mr.Madan S Kumar and Mr.Kevin Koenig and also Non-disclosure agreement between them and the Non-compete agreements. On comparison of these three agreements, we find that the employment contract between M/s SCTL and its employees contains the clauses relating to emoluments and perquisites and the relocation expenses, leave and medical insurance and also a clause that the employees are expected to execute employee agreement, covering among other things Non-disclosure confidential information. It also contains that the employee is 'at will' employee and can be terminated at any time, which means that if the company wants to terminate the services with cause no notice is required and without cause one month notice is given. It also provides that the employee may terminate his association with the assessee for any reason or no reason by giving one month notice or payments of one month gross salary, in view of the same. The Non-disclosure agreement contains the following; 1. Maintaining confidential information 2. Retaining & assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re associated with M/s SCTL group for a period of one year prior to the termination of the employee's services from M/s SNSL or M/s SCTL which ever is later in time 5. Consideration: Consideration for agreeing to the Non-compete agreement also clarifies that all tax arising from the consideration will be to the employees account. It also mentions that the payment of consideration will be made to each employee with in a period of 45 days from the entering into of this agreement. 6. Miscellaneous; This clause contains the remedy for breach of the agreement constituting that M/s SNSL or M/s SCTL shall be entitled to injunctive relief or a decree for specific performance and such other relief as may be appropriate. It also safeguards M/s SNSL & M/s SCTL from any liability to employee or any third party for any direct or special, consequential special or speculative damages including without limitation damages caused due to loss of profit arising from this agreement. Annex-I contains the list of the companies which the employees may not join on termination of their employment with the assessee company. 8.2 Thus, it can be seen that the finding of AO and the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered as sham transactions, they are null and void and no tax was deductible at all. Consequently, the payments shall not be taxed in the hands of the assessee, as 'the assessee in default' for non-deduction of tax at source. We find that the Non-compete agreement had been entered into on 02-05-2005 and the payments have been made on 31-05-2005. We have already held that the terms and conditions of the Non-disclosure agreement are not exactly the same as the Non-compete agreement, as the two employees have been with the group company considerably for a long period and have also attained considerable knowledge about the assessee's group. It was necessary on the part of the assessee to enter into Non-compete agreement with these two employees to safeguard its interests. In view of the same, according to us, it cannot be held to be sham transactions. As rightly submitted by the learned counsel for the assessee that if these transactions are to be considered as sham transactions, then the necessary consequence would be that no payments have been made and if no payments are made, there would not arise any occasion to deduct tax at source. Undisputedly, the assessee has made payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercised in the place where the employee is physically present, when performing activities for the employment income is paid. He also made a reference to the commentary by a renowned economist and an expert on international taxation Mr.Klaus Vogel on Double Taxation convention, wherein it was mentioned that according to its wording 'Article-15' is not restricted to 'remuneration' derived in respect of personal services from sources in a contracting state. It differs from the other distributive rules in that, it therefore, applies to remuneration received from sources in third states as well. As a result, Article-21 is not applicable to income from dependent personal services. While referring to the explanatory notes on the Model Conventions of OECD and particularly to Article-15 of the said convention, he drew our attention to the meaning of 'Dependent Personal Services' According to the said notes, when a person perform a dependent service, all consideration received is income from such service under Article-15 and a broad interpretation is necessary in particular to ensure that all types of employee income received are taxable under domestic laws are included with as few loophole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is taxable as business income, the learned counsel for the assessee submitted that for invoking provisions of section 28 of IT Act a nexus with a business is a pre-requisite and he submitted that the said two employees were not carrying on business, but they were in employment with the assessee and thus, the payments made under Non-compete agreement cannot be taxed u/s 28(va) of the IT Act. He submitted that even if it is treated as business income, the business income would be charged to taxed only on the existence of a permanent establishment i.e. permanent establishment in India, but as the two employees did not have a permanent establishment in India, the same is not taxable as business income. 9.1 As regards the findings of the CIT(A) that this amount is taxable under the head ' Other income' under Article-23 of DTAA, the learned counsel for the assessee submitted that the Article-23 is residuary provision, which means that if the income does not fall under any other heads, only then can it be considered as income from other sources. He submitted that as demonstrated by him, the income in the hands of the recipients is clearly a salary, as it is related to employment and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and are also rendering services in USA. 9.5 As regards question No.8, learned DR had relied upon the order of the CIT(A) and had submitted that the assessee should have approached the appropriate authority for issuance of certificate under sub-section-2 of section 195, if it was the opinion that the whole of the amounts payable would not be the income chargeable to tax in the hands of the recipients, which the assessee has failed to do. Thus, according to learned DR, the amount was tax deductible at source and in the absence of the same the assessee should be treated as the 'assessee in default'. 10. The learned counsel for the assessee on the other hand submitted that these amounts paid to the employees were in the nature of salary which was not taxable in India, in view of the Article-16 of DTAA and therefore, it was not necessary on its part to approach the appropriate authority under sub-section-2 of section 195 of IT Act. 10.1 Having heard both the parties and having gone through the relevant provisions, we find that it is provided therein that where the person responsible for paying any such sum chargeable under the IT Act (other than salary) to a non-resident considers th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
