Non-compete fees on termination of employment qualify as salary in India, and the employer is statutorily required to withhold taxes prior to making payment.

In a recent ruling, the Karnataka High Court has held that an Indian company will not be liable to withhold tax on non-compete fees paid to key employees performing services in the US and having received payments in the US under the provisions of Article 16(1) of the India-US tax treaty.

Although the judgment is fact-specific, it is welcome because it upholds the provisions of the India-US tax treaty on dependent personal services being taxable in the country from where derived.