DIT v. Sasken Communication Technologies Ltd. [ITA
No. 241 of 2011, dt. 10-6-2020] : 2020 TaxPub(DT) 2541 (Karn-HC)
Profit in lieu of salary under section 17(3) -- Non-compete
fee paid to non-resident employees -- TDS default applicability -- DTAA Article
16 scope
Facts:
Two non-resident employees based out of USA working with
the subsidiary of assessee were offered employment by assessee subsequent to
the merger of the said subsidiary. Non-compete agreements were signed by
assessee post employment with both employees and amounts were paid to them as
non-compete fee outside India to USA without TDS. Lower Tax Authorities alleged
default for non-deduction of TDS under sections 195, 201(1) read with 201(1A).
ITAT reversed the orders of lower tax authorities. On higher appeal by
department to High Court--
Held against the department in favour of assessee that --
1. The amounts paid were indeed
profits in lieu of salary arising post employment.
2. The same cannot be alleged as
business income as employees did not have any business in India.
3. Indo-US DTAA -- Article 16
grants right of taxation of salary or employment benefits only in country of
employment, i.e., where services were performed. Since employees were
non-residents the same cannot be taxed in India.
4. Commissioner (Appeals)
holding that the income would be taxed under Article 23(3) -- Other Income
clause of DTAA was also incorrect when Article 16 was capable of covering the
payment in its scope.
5. Since no taxability arose in
India no TDS obligations existed for assessee this they were not in default.
Editorial Note: The
structuring adopted is what makes it a noteworthy decision. Article 23 other
income clause of DTAA is not an omnibus section is no longer res integra.