Non-Compete Fees paid to Employees not Taxable as per Indo-USA Tax Treaty: Karnataka HC [Read Judgment]

Non-Compete Fees - Karnataka High Court - Taxscan

The High Court of Karnataka held that 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 Double Taxation Avoidance Agreement (DTAA) between India and U.S.A.

Two employees i.e. M.S.Kumar and Mr. Kevin Koenig was in the employment of M/s SNSL a subsidiary company of the assessee and were employed as Chief Executive Officer and Chief Operating Officer respectively. The subsidiary company merged with the assessee. The assessee, therefore, offered employment to the two persons, as they were in key strategic positions of the subsidiary company.

The assessee filed the C.A. Certificate with the remitter bank with the endorsement that no tax is required to be deducted at source since remittance is towards consideration under the Non-Compete Agreement and is covered by Article 16(1) of the DTAA between India and USA. The Income Tax Officer commenced an inquiry 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 held that agreements and the payment made thereunder to the two employees of the company were created for the purposes of avoiding payment of tax in India. Therefore, it was held that the amount of tax has to be deducted as quantified by taking assessee in default and interest under Section 201(1A) of the Act was levied.

On an Appeal to the Commissioner of Income Tax (Appeals), while upholding the order of AO said 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.

The Division Bench of Justice Alok Aradhe and Justice Hemant Chandangoudar held that 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 Double Taxation Avoidance Agreement (DTAA) between India and U.S.A.

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