THE DIRECTOR OF INCOME-TAX vs. M/S SASKEN COMMUNICATION

a) Whether the Tribunal was correct in holding that a sum of Rs.4,93,07,540/- paid to Mr.Madan S. Kumar & Mr.Kevin

Koenig by the assessee is in the course of employment and would fall under the head ‘Salary’ or ‘Profit in lieu of Salary’ and not under the head ‘Business income’ as per Section 28(va) of the Act, as held by the assessing officer?

(ii) Whether the tribunal was correct in holding that payment made by the assessee of Rs.4,93,07,540/- paid to Mr.Madan S.Kumar & Mr.Kevin Koenig is income which has arisen or accrued to the recipients in USA as provided under Article 16 of the DTAA between Indian and USA?

(iii) Whether the assessing officer as well as the appellate Commissioner were correct in holding that the assessee was bound to deduct tax at source in respect of Rs.4,93,07,540/- paid to Mr.Madan S.Kumar & Mr. Kevin Koenig and having failed to do so, provisions of Section 201(1) of the Act was ordered and mandatory interest under Section 201(1A)

of the Act was correctly levied, which was not appreciated by the Tribunal?

(iv) Whether the assessing officer as well as the appellate commissioner were correct in holding that the explanation and agreements stated to have been entered into between the assessee and Mr.Madan S.Kumark & Mr.Kevin Koenig were only sham transactions entered into between the parties to avoid tax, which was not appreciated by the tribunal?

FACTUAL BACKGROUND:

(hereinafter referred to as 'the DTAA' for short) also needs to be determined. The relevant facts in order to appreciate the issues involved in the appeal are set out hereinafter:

Agreements were entered into on 02.05.2005 and payments under the agreements to the tune of $5,63,000/- (Rs.2,46,53,770/- each) were made to the employees on 31.05.2005. Thus, the payments were made to the aforesaid persons after they had become the employees of the assessee. Three contracts were executed between the two employees and the assessee viz., Employer Agreement, Non Disclosure Agreement and Employee Non Compete Agreement.

and notice was issued to the assessee to show cause as to why it should not be treated as assessee in default under Section 201 of the Act. The assessing officer by an order dated 31.03.2006 inter alia held that agreements and the payment made thereunder to the two employees of the company was sham and created for the purposes of avoiding payment of tax in India. Therefore, it was held that amount of tax have to be deducted as quantified by taking assessee in default and interest under Section 201(1A) of the Act was levied. The aforesaid order was subject matter of challenge before the Commissioner of Income Tax (Appeals).

known to the assessee. It was further held that under the agreement the employees have been prohibited from taking employment with the competitors of the assessee based in India and the prohibition from taking employment will operate in India with regard to 7 companies mentioned in Non Compete Agreement. It was also held that rights and obligations of the parties under the non compete agreement were to take effect in India. It was held that income under the Non Compete Agreement arises in India under Section 5(2) of the Act and the payments cannot be treated as arising from employment or treated as profits in lieu of salary within the meaning of Section 17(3) of the Act. The Commissioner of Income Tax (Appeals) also held that non compete fees paid to the two employees by the assessee is taxable under Article 23(3) of DTAA and the appellant has not been able

to show that the two employees have paid taxes voluntarily or otherwise to the United States Government.

Accordingly, the order of the Assessing Officer on the aforesaid aspect was upheld.

therefore, the same cannot be treated as business income. The income cannot fall under residuary heads as the same is covered under the head salary. It was also held that amounts paid to the employees were in the nature of salaries, which were not taxable in India and therefore, in view of Article 16 of DTAA, it was not necessary for the assessee to approach the appropriate authority under Section 195(2) of the Act. Accordingly, it was held that assessee cannot be treated to be an assessee in default under Section 201(1) of the Act. In the result, the order passed by the Assessing Officer and Commissioner of Income Tax (Appeals) was quashed and the appeals filed by the assessee were allowed. In the aforesaid factual background, the revenue is in appeal before us.

ARGUMENTS:

by the tribunal, it is submitted that the lump sum payment made under a restrictive covenant before acceptance of payment cannot be treated as salary. It is also pointed out that the assessee has entered into sham transactions with its employees for the purposes of tax evasion. It is further submitted that the tribunal grossly erred in holding that Non Disclosure and Non Compete Agreements are different and the income ought to have been treated as income from other sources and Article 23(2) of the DTAA is applicable in the fact situation of the case. In support of aforesaid submissions, reliance has been placed on decisions of the supreme court in ‘PERFORMING RIGHT SOCIETY LTD. VS. COMMISSIONER OF INCOME-TAX’, (1977) 106 ITR 11 (SC) and ‘PILCOM VS. CIT WEST BENGAL-VII’, CIVIL APPEAL NO.5749 OF 2012.

DTAA would override the provisions of the Act in a matter of ascertainment of chargeability to income tax and ascertainment of total income to the extent of inconsistency between the two. It is also pointed out that it has rightly been held by the tribunal that Non Disclosure Agreement and Non Compete Agreement are different inasmuch as the former applies in case of an employee who is in employment whereas, the latter applies in the case where the employment ceases to exist. It is also urged that payer is bound to deduct tax at source only if the tax is assessable in India. It is also pointed out that before the Delhi High Court, the revenue itself had made a submission that non compete fee should be treated as salary and the aforesaid contention was accepted. It is also urged that the decision relied upon by the revenue in the case of PERFORMING RIGHTS SOCIETY LTD.

Supra as well as PILCOM supra are distinguishable as the telecast as well as the matches took place in India. In support of aforesaid submissions, reliance has been placed on the decision in ‘K.RAVINDRANATHAN NAIR VS. CIT’, (2001) 114 TAXMAN 53 (SC), ‘VIJAY KUMAR TALWAR VS. CIT’, (2011) 196 TAXMAN 136 (SC), ‘UNION OF INDIA VS. AZADI BACHAO ANDOLAN’, (2003) 132 TAXMAN 373 (SC), ‘ GE INDIA TECHNOLOGIES CEN. (P) LTD. VS. CIT’, (2010) 193 TAXMAN 234 (SC), ‘ CIT VS. KANWALJIT SINGH’, (2012) 28 TAXMANN.COM 28 (DELHI) and ‘CIT VS. D.P.SANDU BROS. CHEMBUR (P.) LTD.’, (2005) 142 TAXMAN 713 (SC).

STATUTORY PROVISIONS: 9. We have considered the submissions made on both the sides and have perused the record. Before proceeding further, it is apposite to take note of statutory provisions.

Section 5(2) of the Act deals with income of a non resident. The relevant extract of Section 5(2) reads as under:

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non- resident includes all income from whatever source derived which—

(a) xxxxx

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

(ii) income which falls under the head" Salaries" if it is earned in India. Explanation.- For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, (c) shall be regarded as income earned in India;

Thus it is evident that an income shall be treated as salary if it is earned in India and for services rendered in India.

(1) " Salary" includes-

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

Thus, from perusal of aforementioned provision it is clear that definition of the expression ‘salary’ is inclusive and it includes any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages.

(iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person- before his joining any employment with that person; or after cessation of his employment with that person.

sum or otherwise by an assessee from any person before his joining any employment from that person or after cessation of his employment with that person.

taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

LEGAL PRINCIPLES:

TIWARI’, (2001) 3 SCC 179 while dealing with the expression ‘to be a question of law involving in the case’ held that ‘to be a question of law involving in the case’, there must be first a foundation for it laid in pleadings and the questions emerged from sustainable findings of fact arrived at by courts of fact and it must be necessary to decide that question of law for a just and proper decision of the case. It has been held that entirely a new point raised for the first time before the High Court is not a question involved in a case unless, it goes to the root of the matter. In ‘HERO VINOTH (MINOR) VS. SESHAMMAL’, (2006) 5 SCC 545 while dealing with the scope of Section 260A of the Act, it was held that this court will not interfere with findings of the court, unless the courts have ignored material evidence or acted on no evidence or have drawn wrong inferences from proved facts by

applying the law erroneously or the decision is based on no evidence. The aforesaid decisions were referred to with approval in VIJAY KUMAR TALWAR supra as well as in ‘UNION OF INDIA V. IBRAHIM UDDIN’, (2012) 8 SCC 148 and has been followed by a division bench of this court in ‘CIT VS. SOFT BRANDS (P.) LTD.,’ (2018) 406 ITR 513. In G.E.TECHNOLOGIES supra, it has been held that the payer is bound to deduct tax at source if the tax is assessable in India.

tribunal has noticed that admittedly, the two employees were in employment as Chief Executive Officer and Chief Operating Officers of subsidiary company with effect from 01.04.2004, which subsequently merged with the assessee on 01.04.2005. It has further been held that Non Compete Agreements were entered on 02.05.2005 and payments were made on 31.05.2005 after the aforesaid employees had accepted the employment in the assessee on 31.03.2005 and 23.05.2005 respectively. Thus, they had received the amount in question being employees of the assessee. On meticulous scrutiny of the clauses of Non Disclosure Agreement and Non Compete Agreement, the tribunal has held 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.

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 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.

decision does not apply to the fact situation of the case.

CONCLUSION: 20. In view of the preceding analysis, we find that matter stands concluded by findings of fact and the revenue has not been able to either plead or place on record material to show that findings of fact recorded by the tribunal are perverse. Thus, we hold that no substantial questions of law arise for consideration in this appeal.

In the result, the appeal is dismissed.

Sd/- JUDGE

Sd/- JUDGE ss