1 IN HIGH COURT OF KARNATAKA AT BENGALURU R DATED THIS 10TH DAY OF JUNE 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.241 OF 2011 BETWEEN: 1. DIRECTOR OF INCOME-TAX INTERNATIONAL TAXATIONRASHTROTHANA BHAVANNRUPATHUNGA ROAD,BANGALORE 2. INCOME TAX OFFICER INTERNATIONAL TAXATION,WARD 19 (2)RASHTROTHANA BHAVANNRUPATHUNGA ROAD, BANGALORE APPELLANTS (By SRI.K.V.ARAVIND, ADV.,) AND: M/S SASKEN COMMUNICATION TECHNOLOGIES LTD., NO.139/25, AMARJYOTHI LAYOUT, RING ROAD, BANGALORE ... RESPONDENT (By SRI.T.SURYANARAYANA, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 25.02.2011 PASSED IN ITA 2 NOS.287 & 891/BANG/2009, FOR ASSESSMENT YEAR 2006-7, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (I) FORUMLATE SUBSTANTIAL QUESTION OF LAW STATED THREIN. (II) ALLOW APPEAL AND SET ASIDE ORDERS DATED 25.02.2011 PASSED IN ITAT, BANGALORE IN ITA NOS.287 & 891/BANG/2009 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY INCOME TAX OFFICER, INTERNATIONAL TAXATION, WARD-19(2), BANGALORE IN INTEREST OF JUSTICE AND EQUITY. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act , for short) has been filed by revenue. subject matter of appeal pertains to Assessment year 2006-07. appeal was admitted by Bench of this Court vide order dated 26.06.2012 on following substantial questions of law: a) Whether Tribunal was correct in holding that sum of Rs.4,93,07,540/- paid to Mr.Madan S. Kumar & Mr.Kevin 3 Koenig by assessee is in course of employment and would fall under head Salary or Profit in lieu of Salary and not under head Business income as per Section 28(va) of Act, as held by assessing officer? (ii) Whether tribunal was correct in holding that payment made by assessee of Rs.4,93,07,540/- paid to Mr.Madan S.Kumar & Mr.Kevin Koenig is income which has arisen or accrued to recipients in USA as provided under Article 16 of DTAA between Indian and USA? (iii) Whether assessing officer as well as appellate Commissioner were correct in holding that 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 Act was ordered and mandatory interest under Section 201(1A) 4 of Act was correctly levied, which was not appreciated by Tribunal? (iv) Whether assessing officer as well as appellate commissioner were correct in holding that explanation and agreements stated to have been entered into between assessee and Mr.Madan S.Kumark & Mr.Kevin Koenig were only sham transactions entered into between parties to avoid tax, which was not appreciated by tribunal? FACTUAL BACKGROUND: 2. Twin issues arise for consideration in this appeal viz., (a) whether remittance of amounts to employees under non compete agreements are chargeable to tax under Section 5(2) of Act, (b) if so, head of income under which it is liable for taxation under Act and issue of its taxability under Double Taxation Avoidance Agreement 5 (hereinafter referred to as 'the DTAA' for short) also needs to be determined. relevant facts in order to appreciate issues involved in appeal are set out hereinafter: 3. Admittedly, two employees viz., M.S.Kumar and Mr.Kevin Koenig were in employment of M/s SNSL subsidiary company of assessee and were employed as Chief Executive Officer and Chief Operating Officer respectively with effect from 01.04.2004. aforesaid subsidiary company merged with assessee on 01.04.2005. assessee therefore offered employment to aforesaid two persons on 31.03.2005, as they were in key strategic positions of subsidiary company. Mr.Kumar and Mr.Kevin Koenig accepted offers of employment with assessee respectively on 31.03.2005 and 23.05.2005. Non Compete 6 Agreements were entered into on 02.05.2005 and payments under agreements to tune of $5,63,000/- (Rs.2,46,53,770/- each) were made to employees on 31.05.2005. Thus, payments were made to aforesaid persons after they had become employees of assessee. Three contracts were executed between two employees and assessee viz., Employer Agreement, Non Disclosure Agreement and Employee Non Compete Agreement. 4. assessee filed C.A. Certificate with remitter bank with endorsement that no tax is required to be deducted at source since, remittance is towards consideration under Non Compete Agreement and is covered by Article 16(1) of DTAA between India and USA. Income Tax Officer commenced enquiry on 10.06.2005 7 and notice was issued to assessee to show cause as to why it should not be treated as assessee in default under Section 201 of Act. assessing officer by order dated 31.03.2006 inter alia held that agreements and payment made thereunder to two employees of company was sham and created for 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 Act was levied. aforesaid order was subject matter of challenge before Commissioner of Income Tax (Appeals). 5. Commissioner of Income Tax (Appeals) by order dated 30.01.2009 inter alia held that place of execution of Non Compete Agreements is not specified for reasons best 8 known to assessee. It was further held that under agreement employees have been prohibited from taking employment with competitors of assessee based in India and 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 parties under non compete agreement were to take effect in India. It was held that income under Non Compete Agreement arises in India under Section 5(2) of Act and payments cannot be treated as arising from employment or treated as profits in lieu of salary within meaning of Section 17(3) of Act. Commissioner of Income Tax (Appeals) also held that non compete fees paid to two employees by assessee is taxable under Article 23(3) of DTAA and appellant has not been able 9 to show that two employees have paid taxes voluntarily or otherwise to United States Government. Accordingly, order of Assessing Officer on aforesaid aspect was upheld. 6. Being aggrieved, assessee filed appeals against order passed under Section 201(1) and Section 201(1A) read with Section 195 of Act before Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). tribunal by order dated 25.02.2011 allowed appeals preferred by assessee. tribunal inter alia held that amount paid to employees by assessee under Non Compete Agreements would fall under term salary or profit in lieu of salary . It was further held that since, no business is being carried on by employees in India, 10 therefore, same cannot be treated as business income. income cannot fall under residuary heads as same is covered under head salary. It was also held that amounts paid to employees were in nature of salaries, which were not taxable in India and therefore, in view of Article 16 of DTAA, it was not necessary for assessee to approach appropriate authority under Section 195(2) of Act. Accordingly, it was held that assessee cannot be treated to be assessee in default under Section 201(1) of Act. In result, order passed by Assessing Officer and Commissioner of Income Tax (Appeals) was quashed and appeals filed by assessee were allowed. In aforesaid factual background, revenue is in appeal before us. 11 ARGUMENTS: 7. Learned counsel for revenue submitted that since, assessee had already executed Non Disclosure Agreement and therefore, there was no need to separately execute Employee Non Compete Agreement. It is further submitted that clause in Non Compete Agreement creates prohibition with regard to employment in respect of companies situate in India and therefore, rights and obligations of parties under Non Compete Agreement were to take effect in India and therefore, amount paid to employees under Non Compete Agreement is covered under Section 5(2) of Act. Learned counsel for revenue has taken us through order passed by Commissioner of Income Tax (Appeals). While pointing out to order passed 12 by tribunal, it is submitted that lump sum payment made under restrictive covenant before acceptance of payment cannot be treated as salary. It is also pointed out that assessee has entered into sham transactions with its employees for purposes of tax evasion. It is further submitted that tribunal grossly erred in holding that Non Disclosure and Non Compete Agreements are different and income ought to have been treated as income from other sources and Article 23(2) of DTAA is applicable in fact situation of case. In support of aforesaid submissions, reliance has been placed on decisions of 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. 13 8. On other hand, learned counsel for assessee submitted that amount paid to employees is not chargeable to tax in India under Act. Alternatively, it is submitted that under DTAA, tax, if any, has to be levied in United States. In this connection, learned counsel has invited attention of this court to Section 5, Section 9 and Section 17 of Act. It is further submitted that employees have not rendered any services in India and on basis of meticulous appreciation of evidence on record, findings of fact have been recorded and there is neither any pleading nor any material placed on record to show that findings recorded by tribunal are perverse. It is argued that in fact, no substantial questions of law arise for consideration in this appeal and matter stands concluded by findings of fact. It is further submitted that provisions of 14 DTAA would override provisions of Act in matter of ascertainment of chargeability to income tax and ascertainment of total income to extent of inconsistency between two. It is also pointed out that it has rightly been held by tribunal that Non Disclosure Agreement and Non Compete Agreement are different inasmuch as former applies in case of employee who is in employment whereas, latter applies in case where employment ceases to exist. It is also urged that payer is bound to deduct tax at source only if tax is assessable in India. It is also pointed out that before Delhi High Court, revenue itself had made submission that non compete fee should be treated as salary and aforesaid contention was accepted. It is also urged that decision relied upon by revenue in case of PERFORMING RIGHTS SOCIETY LTD. 15 Supra as well as PILCOM supra are distinguishable as telecast as well as matches took place in India. In support of aforesaid submissions, reliance has been placed on 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). 16 STATUTORY PROVISIONS: 9. We have considered submissions made on both sides and have perused record. Before proceeding further, it is apposite to take note of statutory provisions. Section 5(2) of Act deals with income of non resident. relevant extract of Section 5(2) reads as under: 5. (2) Subject to provisions of this Act, total income of any previous year of person who is 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. 17 10. Section 9 of Act defines expression income deemed to accrue or arise in India. relevant extract of clause (ii) appended to explanation 7 of Section 9(1) is reproduced below for facility of reference: (ii) income which falls under head" Salaries" if it is earned in India. Explanation.- For removal of doubts, it is hereby declared that income of nature referred to in this clause payable for- (a) service rendered in India; and (b) rest period or leave period which is preceded and succeeded by services rendered in India and forms part of service contract of employment, (c) shall be regarded as income earned in India; 18 Thus it is evident that income shall be treated as salary if it is earned in India and for services rendered in India. 11. Section 17 of Act defines expression salary, perquisites and salary in lieu of salary , relevant extract of Section 17(1) of Act reads as under: 17. " Salary"" perquisite" and" profits in lieu of salary" defined 3For purposes of sections 15 and 16 and of this section,- (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; 19 Thus, from perusal of aforementioned provision it is clear that definition of expression salary is inclusive and it includes any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages. 12. Section 17(3) of Act defines expression profits in lieu of salary . relevant extract of Section 17(3) reads as under: 17(3) " profits in lieu of salary" includes- (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. 13. Thus it is evident that expression profits in lieu of salary includes any amount lump 20 sum or otherwise by assessee from any person before his joining any employment from that person or after cessation of his employment with that person. 14. Admittedly, DTAA has been executed between India and United States. Article 16(1) of DTAA reads as under: 16(1) Subject to provisions of Articles 17 (Directors Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages and other similar remuneration derived by resident of Contracting State in respect of employment shall be 21 taxable only in that State unless employment is exercised in other Contracting State. If employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. LEGAL PRINCIPLES: 15. After having noticed statutory provisions, we may take note of well settled legal principles. It is cardinal principle of law that tribunal is fact finding authority and decision on facts on tribunal can be gone into by High Court only if question has been referred to it, which says finding of tribunal is perverse. [SEE: SUDARSHAN SILKS & SAREES VS. CIT , 300 ITR 205 SCC @ 211 and MANGALORE GANESH BEEDI WORKS VS. CIT , 378 ITR 640 (SC) @ 648]. three judge bench of Supreme Court in SANTOSH HAZARI VS. PURSHOTTAM 22 TIWARI , (2001) 3 SCC 179 while dealing with expression to be question of law involving in case held that to be question of law involving in case , there must be first foundation for it laid in pleadings and 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 just and proper decision of case. It has been held that entirely new point raised for first time before High Court is not question involved in case unless, it goes to root of matter. In HERO VINOTH (MINOR) VS. SESHAMMAL , (2006) 5 SCC 545 while dealing with scope of Section 260A of Act, it was held that this court will not interfere with findings of court, unless courts have ignored material evidence or acted on no evidence or have drawn wrong inferences from proved facts by 23 applying law erroneously or decision is based on no evidence. 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 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 payer is bound to deduct tax at source if tax is assessable in India. 16. In backdrop of aforementioned statutory provisions and well settled legal principles, we may advert to facts of case in hand. tribunal in para 7.2 of its order has formulated 10 questions of fact and after detailed appreciation of material available on record has answered same in favour of assessee. 24 tribunal has noticed that admittedly, 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 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 aforesaid employees had accepted employment in assessee on 31.03.2005 and 23.05.2005 respectively. Thus, they had received amount in question being employees of assessee. On meticulous scrutiny of clauses of Non Disclosure Agreement and Non Compete Agreement, tribunal has held that Non Compete Agreement prohibits employee from joining any competitive business entity after termination of employment, whereas, no such clause is available in 25 Non Disclosure Agreement. It was further held that employees who were occupying higher positions in subsidiary companies and were in possession of vital and confidential information were required to be retained in interest of assessee for carrying on its business effectively. It was further held that terms and conditions of Non Disclosure Agreement are not exactly same as Non Compete Agreement. tribunal recorded finding that transactions in question were not sham transactions. 17. tribunal further held that since, employees were rendering services outside India i.e., U.S. and payments were also made in U.S., Article 16 of DTAA applies and same is taxable only in U.S.A. It was held that income in hands of employees is salary / profit in lieu of salary 26 and it has to be treated as such and in view of Article 16 of DTAA, same is taxable in U.S. It was inter alia held that where payments are in nature of salary, payer need not approach appropriate authority under Section 195(2) of Act. It was further held that amount paid to employees of assessee being in nature of salary is not taxable in India in view of Article 16 of DTAA between India and United States and therefore, assessee was not under obligation to deduct at source. assessee, therefore, cannot be deemed to be assessee in default under Section 201(1) of Act. It was also held that since, assessee has not been held to be assessee in default, therefore, interest under Section 201(1A) of Act is not leviable. Accordingly, appeal was allowed. 27 18. From perusal of substantial questions of law, on which appeal has been admitted, we find that findings of fact recorded by tribunal have not been assailed as perverse. It is also pertinent to mention here that even in 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 tribunal are perverse. Therefore, substantial questions of law as framed by bench of this court, in fact, do not arise for consideration in this appeal, as matter stands concluded by findings of fact. amount paid to employees under non compete agreement is covered by expression salary / profits in lieu of salary , which is not taxable in India in view of Article 16 of DTAA. 28 19. So far as reliance placed by learned counsel for revenue on cases in PERFORMING RIGHTS SOCIETY LTD., AND PILCOM supra is concerned, it is pertinent to mention that non resident company in former case was granted performing rights in western music to be broadcast by All India Radio. Since, broadcasting had taken place in India, therefore, it was held that income shall be deemed to be accrued or arise in India as prescribed under Section 5(2) of Act. In instant case, Section 5(2) of Act has no applicability. Therefore, aforesaid decision is not applicable in fact situation of case. Similarly in case of PILCOM supra, associations had participated in matches, which were held in India and therefore, income had accrued in India. For aforementioned reason, said 29 decision does not apply to fact situation of case. CONCLUSION: 20. In view of preceding analysis, we find that matter stands concluded by findings of fact and revenue has not been able to either plead or place on record material to show that findings of fact recorded by tribunal are perverse. Thus, we hold that no substantial questions of law arise for consideration in this appeal. In result, appeal is dismissed. Sd/- JUDGE Sd/- JUDGE ss Director of Income-tax International Taxation, Bangalore / Income-tax Officer International Taxation, Ward 19(2), Bangalore v. Sasken Communication Technologies Ltd