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Tax Publishers 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.

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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.