2020 (6) TMI 432 - HC - Income Tax

Income accrued in India - Characterization of income - 'Salary' or 'Profit in lieu of Salary' OR 'Business income' - Remittance of amounts to employees under non compete agreements are chargeable to tax under Section 5(2) of the Act - head of income under which it is liable for taxation under the Act and issue of its taxability under Double Taxation Avoidance Agreement 'DTAA' - Whether the Tribunal was correct in holding that a sum 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) as held by the assessing officer? - HELD THAT - Employees were rendering services outside India i.e., U.S. and payments were also made in U.S., Article 16 of DTAA applies and the same is taxable only in U.S.A. As held that income in the hands of the employees is salary / profit in lieu of salary 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 u/s 195(2) of the Act. 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. From perusal of the substantial questions of law, on which the appeal has been admitted, we find that the findings of fact recorded by the tribunal have not been assailed as perverse. Even in the memo of appeal neither any grounds have been urged nor any material has been placed on record to demonstrate that findings of fact recorded by the tribunal are perverse. Therefore, the substantial questions of law as framed by a bench of this court, in fact, do not arise for consideration in this appeal, as the matter stands concluded by findings of fact. The amount paid to the employees under the non compete agreement is covered by the expression 'salary / profits in lieu of salary', which is not taxable in India in view of Article 16 of DTAA. 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. - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of payment to employees under Non Compete Agreements.
2. Taxability of such payments under the Double Taxation Avoidance Agreement (DTAA) between India and USA.
3. Obligation of the assessee to deduct tax at source under Section 195 of the Income Tax Act, 1961.
4. Validity of the transactions as genuine or sham.

Detailed Analysis:

1. Classification of Payment to Employees:
The core issue was whether the sum of ?4,93,07,540 paid to two employees under Non Compete Agreements should be classified as 'Salary' or 'Profit in lieu of Salary' or as 'Business income' under Section 28(va) of the Income Tax Act. The Tribunal held that the payments made to the employees were in the course of employment and should be classified under 'Salary' or 'Profit in lieu of Salary'. This classification was significant as it determined the taxability of the payments.

2. Taxability under DTAA:
The Tribunal also addressed whether the payments made to the employees, who were residents of the USA, were taxable in India or the USA. According to Article 16 of the DTAA between India and the USA, salaries and similar remuneration derived by a resident of a contracting state in respect of employment shall be taxable only in that state unless the employment is exercised in the other contracting state. The Tribunal concluded that since the employees rendered services in the USA and the payments were made there, the income was taxable only in the USA.

3. Obligation to Deduct Tax at Source:
The assessing officer and the appellate Commissioner had held that the assessee was bound to deduct tax at source on the payments made to the employees under Section 201(1) of the Act and levied interest under Section 201(1A). However, the Tribunal found that since the payments were classified as salary and taxable in the USA under the DTAA, there was no obligation for the assessee to deduct tax at source under Section 195. Consequently, the assessee could not be treated as an assessee in default under Section 201(1).

4. Validity of Transactions:
Another critical issue was whether the agreements and the payments made thereunder were genuine or sham transactions aimed at avoiding tax. The assessing officer and the appellate Commissioner had deemed the transactions as sham. The Tribunal, however, after a meticulous examination of the agreements, concluded that the transactions were genuine. The Non Compete Agreements were distinct from the Non Disclosure Agreements and were necessary to retain key employees who held strategic positions and possessed confidential information.

Conclusion:
The High Court upheld the Tribunal's findings, noting that the Tribunal is the fact-finding authority and its conclusions were based on a detailed appreciation of the evidence. The High Court found no grounds to interfere with the Tribunal's findings, as they were neither perverse nor unsupported by evidence. The payments under the Non Compete Agreements were rightly classified as 'Salary' or 'Profit in lieu of Salary' and were taxable only in the USA under the DTAA. Consequently, the assessee was not obligated to deduct tax at source, and the transactions were not sham. The appeal was dismissed as no substantial questions of law arose for consideration.