Case Law Details
In the case on hand, the issue of tax ability of stock option is not in dispute as the assessee himself has offered the same to tax while filing his return of income. The only issue is the amount that can be brought to tax in India.
In this case it is not in dispute that the assessee was in India only for a short period i.e. 1.4.2006 on wards and that prior to it, he has not done any service connected with any activity in India. Thus applying the propositions laid down in these cases, to the facts of the case on hand, as the assessee has not rendered service in India for the whole grant period, only such proportion of the ESOP perquisite as is relatable to the service rendered by the assessee in India is taxable in India
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : “F” NEW DELHI
BEFORE SHRI R.P.TOLANI, JM
AND SHRI J.SUDHAKAR REDDY, AM
ITA no. 3452/Del/2011
Assessment Year: 2007-08
ACIT, Circle 48(1) vs. Robert Arthur Keltz
Appellant by:- Ms.Priscilla Singeit, Sr.D.R. Respondent by:- Sh. Nageshwar Rao, Adv.
ORDER
PER J.SUDHAKAR REDDY, AM
This is an appeal filed by the Revenue directed against the order of the CIT(A)-XXX, Delhi dated 29.04.2011 pertaining to the Assessment Year 2007-08.
2. Facts in brief:- The assessment has been done on M/s United Technologies International Operation, USA (‘UTIO’ for short) as a representative assessee of Mr.Robert Aruther Keltz. Mr.Robert Aruther Keltz was an employee of M/s UTIO, USA and was on deputation to the Indian liaison office (hereinafter referred to as ILO of UTIO) w.e.f. 1st April, 2006. He was a Resident and Not Ordinarily Resident during the subject Assessment Year. The employee filed its return of income on 31st July,2007 under Section 139(1) for the Assessment Year 2007-08, declaring income from salary of Rs.1,51,07,902/-. Tax of Rs.50,29,219/- was deducted at source by the employer UTIO. The case was selected for scrutiny. As the employee had already left India, the notice remained unserved. The Assessing Officer completed the assessment ex parte under Section 144 of the Income Tax Act, 1961 on 22nd December, 2009 determining the taxable income at Rs.2,39,34,969/- as the employee left India. The Assessing Officer issued notice to UTIO, Indian Office, to treat it as a Representative assessee, for which proposal the UTIO ILO agreed. Thereafter the Assessing Officer passed an order under Section 163(1)(c) dt. 12.5.20 10 treated UTIO, ILO as the Representative assessee of the employee.
The facts leading to the above addition are stated below. The employee was granted “employee stock options” of 34000 shares on 9th January,2004 by UTIO. These stock options had a vesting period of 3 years from the date of grant of options. Hence the said stock options vested in the employee Mr.Robert Aruther Keltz, on 9th January, 2007 i.e. after a start of the first Indian assignment on 1st April,2006. It is important to note that the employee was eligible to the shares in question, on the vesting date, subject to the condition that the employee continues to be employed with UTIO during the vesting period of 3 years i.e. 9th January,2004 to 9th January,2007. The assessee exercised the stock options on 1st Feb.2007, while on his assignment in India.
While filing the return of income the employee being a Resident and Not Ordinarily Resident during the subject Assessment Year has offered to tax the amount of proportionate ESOP perquisites earned in India, i.e. proportionate to the number of days of his assignment in India. The calculation was given in the return of income. While framing the assessment the Assessing Officer brought to tax the entire amount i.e. the difference between the fair market value of the stocks, on the date when the stock option rights were exercised and the cost recovered from the employee, by treating the same as a perquisite on account of stock options. In other words the whole perquisite amount on account of stock options amounting to Rs. 32,09,756/- was taxed in India. The assessee carried the matter in appeal. Before the First Appellate Authority the assessee contended that the shares in question were allotted to Mr.Robert Aruther Keltz outside India and hence receipt of income, arising out of allotment of such shares was also outside India. It was contended that since the shares were allotted to the employee outside India, the benefit arising there from can not be deemed to be received in India. On the issue whether stock option benefit accrues or arises or is deemed to accrue or arise to the employee in India, it was argued that the option granted to the employee on 9.1.2006, represented a future right of the employee to receive shares of UTIO only, once the vesting requirement of continuing the employment with UTIO, over the vesting period of three years is satisfied. Thus it was argued that stock options accrued to the employee for services rendered by the employee during the grant period of 3 years. It was pointed out that in case the service of the employee is terminated, during the grant period, all such vested stock options automatically lapses. Thus it was argued that as the employee has been for only for a part of the time of the vesting period in India, only a proportionate stock option benefit, which is attributable to period spent in India accrues to the employee. The First Appellate Authority applied the decision of the Jurisdictional Tribunal in the case DCIT vs. Eric Moroux and Ghorayeb Emile and held that only proportionate amount of stock option benefit is taxable in India.
4. Aggrieved the Revenue is in appeal before us.
5. Ground nos. 1, 2 and 3 deal with this issue.
6. The second issue i.e. ground no.4 is on an addition on account of hypo tax. The Commissioner of Income Tax (Appeals) has brought out the issue at para 5 of his order which is extracted for ready reference.
“2. Ground no. 2: The brief background of the case is as under (relevant excerpts from submission date 22.12.2010).
The subject employee is a tax equalized employee. Tax equalization is one of the methods widely used by multinational corporation to ensure that the employee who accepts international assignment do not suffer combined taxes on income (in home and host country) in excess of what they would have paid had they continued to reside in the home country. This arrangement is quite prevalent to ensure that the employee neither suffers a financial hardship nor realize a financial windfall from the tax consequences of international assignment.
Under tax equalization policy’ employer calculates the hypothetical tax (hypo tax) and excludes the same from the employee’s pay. The hypo tax is the amount of the tax liability that the employee would have continued to borne in his home country had he not been seconded to the host country. The employer then assumes the obligation of paying the actual taxes incurred by the employee at the assignment location and at home’ which is included in employee’s salary income while computing his tax liability in the host country.
Under tax equalization’ all the taxes on the income of the subject employee would be borne by the UTIO subject to the condition that the employee would not be eligible to that part of the salary which is equal to his tax liability in USA which would have arisen if he had not been assigned to UTIO’ India (‘hereinafter referred to as ‘hypo-tax’.) Further’ UTIO has agreed to bear the entire tax liability of the subject employee subject to the condition that the amount of hypo tax will be excluded from the salary of the employee since the assessee is not eligible to that part of the salary. Such tax liability is offered to tax in employee’s hand as tax perquisite.
In the return of income for the subject Assessment Year’ the appellant has excluded an amount of Rs. 1’911’872/- on account of hypo tax from the employee’s base salary. This is that part of the salary which never accrued to the employee. The Ld.AO has added back the amount of hypo tax to the base salary on the contention that as no specific exemption or deduction is granted for hypo tax under the Income Tax Act’ 1961 and on the erroneous under standing that the income has already accrued to the employee’ hence’ hypo tax forms part of the employee’s taxable salary.”
7. The Commissioner of Income Tax (Appeals) applied the decision of the Hon’ble Delhi High Court in the case of CIT vs. Dr.Percy Batlivala (2010) 201 0-TIOL- 175-HC-DEL-IT and allowed the case of the assessee.
8. Ground no. 5 is stated as consequential to ground no.4.
9. We have heard Ms.Priscilla Singeit, Ld.Sr.D.R. on behalf of the Revenue and Sh. Nageshwar Rao, Ld.Counsel on behalf of the assessee.
10. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record as well as the orders of the authorities below and case laws cited, we hold as follows.
11. On the first issue of addition on account of ESOPs the Ld.D.R. relied on the decision of the Special Bench of the Tribunal in the case of Sumit Bhattacharya vs. ACIT, 112 ITDL. In this decision the Special Bench brought out the distinction between the stock options and stock appreciation rights. In the case of stock options the assessee is granted some shares either at market value or at a concessional rate and such a grant may be subject to certain conditions. The assessee would become the owner of the shares on exercise of the option to purchase the shares. In such circumstances, the Special Bench had held that the benefit or advantage that the employee would get on the date of exercising the option to purchase the shares would be taxable as a perquisite and the value of the perquisite would be the difference between market price of the shares as on the date of grant and the price for which the assessee has purchased the shares. If the shares are granted free of cost, then the entire value of shares would be a perquisite, on the date the employee becomes the owner of the shares. The argument that the employer company had not granted the stock options but the parent company who is not an employer has granted the stock options and thus it is not a perquisite was not accepted by the Special Bench on the ground that the receipt in question is a fruit of employment.
12. In the case on hand, the issue of taxability of stock option is not in dispute as the assessee himself has offered the same to tax while filing his return of income. The only issue is the amount that can be brought to tax in India. The Commissioner of Income Tax (Appeals) has applied the decision of the Jurisdictional ‘G’ Bench of the Delhi Tribunal in the case of DCIT, Circle 42(1), New Delhi vs. M/s Eric Morquxer and Ghorayeb Emile in ITA no.1 174/Del/2005 and 1 175/Del/05 order dt. 15.2.2008-TIOL-145-ITAT and held as follows.
“3.2. The appellant in its submission against remand report submitted that the facts of the decision of Giridhar Krishna M Vs. ACIT was not applicable in the instant case as the decision was on tax ability of Stock Appreciation Rights (‘SAR’) and not on ESOP. Further’ the decision itself clarified that the tax ability of ESOP and SAR were different.
3.3. The appellant also distinguished the decision of Sumit Bhattacharya vs. ACIT as the decision was related to the tax ability of capital gains arising from transfer of the equity shares as against tax ability of perquisites of stock options in the appellant’s case.
3.4. Considering the above judicial pronouncements and the submission made by the appellant’ it is obvious that in the decisions as referred by Assessing Officer are clearly distinguishable on the facts of the assessee. The reference to circular no. 9/200 7 dt. 20.12.2007′ OECD guidance on treatment of stock based options and the decision of Delhi ITAT in the case of Mr.Eric Moroux and Ellis ‘D’ Rozario clearly laus down that only proportionate amount of stock option benefit relating to period of services rendered in India during the grant period is to be offered to tax in India. Accordingly’ the ground is allowed.”
13. In the case of DCIT vs. Eric Moroux and Ghorayeb Emile (ITA no. 1174 and 1175/Del/2005) the ITAT Delhi Bench at para 8 held as follows.
“8. We have considered the rival submissions. As can be seen from the terms of the Contract the assesses were required to work in France and South Asia for a particular period of time. The contract of employment itself recognizes the division of work to be performed in India and that to be performed in France and South Asia. In the circumstances there is no justification for the AO to have insisted on evidence regarding the nature of services rendered in France and South Asia. There can be no inference that the employees while they were in France and South Asia rendered services in respect of their operations in India. Therefore it cannot be said that their period of employment in France and South Asia should also be considered as services rendered in India. The decision in the case of ex parte employees of Air France clearly supports the stand of the assessee. With regard to the Explanation to S.9(1)(ii) of the Act’ the Amendment w.e.f. 1.4.2000 only brings to tax the salary for the rest period or leave period’ which is preceded and succeeded by services rendered in India. In the facts of the present case we find that the issue is not with regard to rest period or leave period and’ therefore’ the amended provisions will not have any impact whatsoever. Consequently the decision in the case of Sedco Forex International Drilling Co.Ltd. 264 ITR 320 (Uttaranchal) will not have any impact whatsoever. In view of the above ground nos. 1 to 3 of the Revenue are dismissed.”
14. The principle laid down by the Delhi “I” Benches in ITA 2918/D/2005 order dt. 5th December,2008, in the case of ACIT vs. Ellin ‘D’ Rozario is that only proportionate salary would be taxable in India, if a part of activity done by the assessee has no relation to any India specific job or activity. In this case it is not in dispute that the assessee was in India only for a short period i.e. 1.4.2006 onwards and that prior to it, he has not done any service connected with any activity in India. Thus applying the propositions laid down in these cases, to the facts of the case on hand, as the assessee has not rendered service in India for the whole grant period, only such proportion of the ESOP perquisite as is relatable to the service rendered by the assessee in India is taxable in India we uphold the order of the Ld.CIT(A) and dismiss ground nos. 1 to 3 of the Revenue.
15. Ground no.4 of Revenue’s appeal is on the issue of addition on account of hypo tax. Admittedly the issue is covered against the revenue as evident from a plain reading of the ground of the Revenue. The Ld.D.R. was fairly conceded that the issue has been decided against the assessee by Delhi High Court and the Revenue has filed a SLP. Under these circumstances we dismiss this ground of the Revenue by upholding the findings of the First Appellate Authority, wherein he has applied the decision of the Hon’ble Delhi High Court in the case of Dr.Parsi Batliwala (supra).
16. Ground no.5 is on the issue of addition made on account of unfurnished accommodation and value of tax perquisite. Both parties admitted that this issue is consequential to the decision taken in ground no.4. Hence we dismiss this ground of the Revenue.
17. In the result the appeal of the Revenue is dismissed.
Pronounced in the Open Court on 24th May,2013.
