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Separation fee form is taxable: ITAT
July, 27th 2009

Money received by an employee of a foreign company while leaving the firm, even if it is given as non-compete fee, will be taxable in India, going by a tax tribunal ruling.

In the case of a former Chief Executive Officer of Netherlands-based HCL Deluxe NV (HDX), the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) ruled recently that that USD one million received by him on his termination by the firm would be taxed as salary.

When the business of a company is taken over by another, the firm whose business is sold is given a fee as non-compete fee and it undertakes not to start a similar line of activity.

"The entire amount of US dollar 1000,000 is assessable as profits in lieu of salary," the ITAT order said in the case of Ravinder Behl, who had appealed that the amount should not be taxed as salary.

The tribunal said the money was paid because Ravinder Behl's service as Chief Executive Officer (CEO) of the company was terminated and so the payment is taxable.

Behl was an employee of HCL Deluxe NV (HDX), a company incorporated in the Netherlands, and was appointed in 1998 on a gross salary of more than Rs 50 lakh per annum.

However, there was a clause in the agreement signed by Behl that he would receive a non-compete fee if terminated.

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