Tax Payable on ESOP to Dubai Based taxpayer for services rendered in India


ITAT Order in HDFC Dubai based Emloyee’s case

On the first blush, suspecting, – rather strongly doubting  – the correctness of the stance taken by the Revenue –and as  upheld both by the CIT(A) and the ITAT, –  tentatively posted comment read as under:

The assessee is an individual, who is an employee of HDFC Bank Limited, Mumbai, and currently on deputation to HDFC Bank Representative Office in Dubai. The status of the assessee is of the non-resident.

Reaction (personal) : These admitted crucial facts , if viewed in proper perspective, must be more than adequate/clinching for the AO to have granted a refund of the TDS. More so because , in the case of a ‘Non-resident’ , income chargeable under the head of ‘salaries’ (including benefits /  perquisites ) is or could not conceivably be taxed in India,  as clearly and unequivocally envisaged in the IT Act. That is, there being no need or warrant whatsoever for going into the tax treaty implications.

Notwithstanding that the assessee has, unwittingly or otherwise, placed his claim for refund by invoking the concept of ‘DTA relief’.

For that matter, also the two questions  as framed for adjudication by the ITAT are seen to have failed to bring to proper focus the real points of dispute. 


2.1. The Revenue’s stance,- though upheld by the ITAT on the line of reasoning adopted and the grounds of its decision, – seems to have the effect of making inroads into the thus far prevailing legal position founded principally on the basic objective and tax treaty implications clearly and unequivocally intended for ‘avoidance of double taxation’. Hence, the Order calls for an independent study and incisive understanding for forming an opinion, for the altruistic benefit of the taxpayer’s community having vested concerns and interests.

2.2. A. The tax status of the assessee – appellant, as admitted with no reservation or quarrel is, that of a “RESIDENT” in Dubai, within its meaning both under the applicable Treaty and the IT Act.

Accordingly, therefore, the entire income under the head of ‘salaries’, inclusive (not exclusive) of any item of benefit or perquisite, could conceivably be taxed ONLY IN DUBAI, being the country in which the employment has been exercised / the income has been earned.

B. Though not made clear or explicitly borne out by the Order, on a reading in between lines, it is to be believed that, –

HDFC as the employer, in compliance with the requirement of the IT Act, has deducted tax at source (TDS), and made payment thereof, on a monthly basis, to the Dubai Government. And, the employee has been paid and received the salary, net of the said TDS.

C. HDFC is stated to have paid a sum by way of tax on the ESOP benefit/ perquisite, on a standalone basis; and, deducted it from the salaries due to the employee in 2013 and 2014.

The following points are, however, – there being no specific mention in the Order, -not clear or readily decipherable;  but in the result, left anyone  to remain confused, in the following respects:

i) Under the scheme of things as unequivocally envisaged in the IT act, the ESOP benefit/ perquisite is taxable as ‘income’ in the tax year / previous year in which the shares are vested / allotted; not in any preceding year or subsequent year.

According to one’s straight forward reading and indelible understanding of the Order,   that such is the correct position in law does not seem to have been contested ; but seems to have been admitted.

ii) Tax deducted on the amount of ESOP benefit / perquisite as aforesaid from employee’s salary, in the normal circumstances, ought to have been paid over to the Dubai Government, being the country in which the salary income (inclusive of all benefits/ perquisite) is taxable. To put it differently, – should, as per the Dubai Domestic law,  ESOP benefit is not taxable in Dubai, then the question of TDS thereon is utterly inconceivable, being a nonstarter.

iii) In case the sum of tax on the ESOP benefit, recovered from the employee,- in dispute-  has been – as suspected of- , paid over to the local Government (of India), that could only be regarded to have been wrongly done; not as per the requirement of the IT Act.

ASIDE: Premised so, refund of the amount of TDS wrongly recovered from the employee will, strictly speaking, be required to be asked for by HDFC , not by the employee.

4. Most of the observations made / grounds of the decision in the Order (Para.9), that are adverse to the assessee-appellant, apparently have been made in reference to his claim for DTA relief from the Government of India. As viewed in a different perspective, however, even otherwise, no DTA relief could conceivably be allowable/ have been allowed in a case in which, the employee’s salary income is taxable / could have been taxed only in Dubai; not in India.

5. It is an admitted/ indisputable fact that the event of vesting and allotment of ESOP shares took place in the years 2007 and 2008.

As is REQUIRED TO BE RECALLED AND BORNE IN MIND that was the point in time / years in which certain changes in the law came to be affected IN QUICK SUCCESSION.

In saying so, me have in mind the then made following amendments of the IT Act: –

a) The fresh enactment made that was in force for the AYs 2001- 02 to 2007-08 – the  see Proviso to sec 17 (2) (iii);

b) Deletion of the referred Proviso was made consequent to the insertion of sec 115 WB (1) w.e.f. 1-4-2008 (FBT) for AYs 2008-09 AND 2009-10; and

c) The further change made consequent to the newly introduced instrument of ‘specified security’, to be applicable for AYs 2010-11, and onwards.

KEY Note: Of course, not to forget that these are changes in the domestic legislative enactment (of India), which are of direct relevance only for domestic law purposes; and for an assessee, UNLIKE IN THE INSTANT CASE, is taxable as a ‘RESIDENT’ in India.

On the flip side, however, this could have been the one more quite possible reason as to why the ESOP Benefit was not thought of , and / or considered to be includible, hence not included, in reckoning the employee’s salary for TDS  purpose, for the AYs 2008-09 and 2009-10. That , however, needs a separate examination.

In this context, it calls for a special noting and consideration, that as borne out by the Indo UAE Treaty itself, the ‘tax year’ of Dubai is calendar year, whereas it is the 12 months period – 1st April to the following 31st March.

6. The concluding observations in the Order (Para.9) holding that the itat (Mum) decision in ACIT Vs Robert Arthur Kultz [(2013) , wherein the assessee was a RNOR, is in favour of the Revenue are, to say the least, patently misconceived , That suffers from a faulty reasoning and unsound logic; for, in no way , even remotely, the said decision could be regarded to be applicable to the case of a Non-resident assessee (in India) based in Dubai- as in the instant case.

May have more to add!

Disclaimer:  Meanwhile, to the personal thoughts and viewpoints impersonally shared above, are open to be EDITED/ VALUE ADDED, in deference to the INVITE sincerely extended to the eminent ‘experts’ infield practice through related posts,- besides on FB and LinkedIn, on the website of itatonline (that has been done in a specific reference to certain other RELATED Orders of the ITAT passed recently, in a quick succession).

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  1. concernedinvestor says:

    The ESOPs were only *granted* on 1st June 2007 with a vesting period of 2 years. The employee moved to Dubai on 1st October 2007 and thus became a non resident outside India and resident in Dubai. It is no understandable why India can seek to tax the component that vested in Dubai (i.e. between 1st October 2007 and 1st June 2009). that should not be taxed in India?

  2. vswami says:

    in an attempt to cover one of the important AREAs left unfinished :

    Under the IT Act (India) , in terms of the governing provisions of Sec 17(2) (vi) and the inter-connected Sec 49 (2AA) (& 49 (2 AB) ) , the ESOP ( Sweat Equity) Benefit is taxable in two stages ,–
    (a) on the vesting and allotment of the shares/ security , as ‘perquisite ; and
    (b) on transfer (sale) of the shares / security , as ‘Capital Gains’)
    For the stage (b) , for computing the chargeable capital gains, the cost of acquisition of such shares / security will be, – AS SPECIFIED, – the FMV which HAS BEEN TAKEN INTO ACCOUNT WHILE COMPUTING THE VALUE OF ‘PERQUISITE’ – at the stage (a) .
    Now, in the instant case, as aforesaid, on the admitted FACTS, HDFC employee, a Non- resident Indian ( RESIDENT of Dubai) , have had as per the Domestic law of Dubai to pay / paid NO TAX ON his ‘Employment Income’(inclusive of ESOP- Benefit (‘perquisite’)). As such, computation of ‘capital gains’ , as envisaged at the stage (b) stands rendered impossible . More so, because the referred provisions (rtw the Rules there under) are, in terms, to be not but construed as a SEPARATE (EXCLUSIVE / INDEPENDENT ) CODE by selves.
    With concerted focus on the land mark Judgment in B. C. Srinivasa Setty’s case, and drawing ample support there from, the instant case is clearly one in which the mechanism for computation of capital gains DOTH HAVE FAILED – AGREE ?!?
    Key note: That , however, is not to be taken as the only angle calling for an independent and in-depth study by anyone who cares to, and ventures to do so. For the other angles in mind, recommend to go through the several Articles, Posts and Blogs on the Topic of , – TAX Treat y (- ies) VS Domestic Law (s) , earlier shared !

  3. vswami says:

    For a better appreciation of the Pr. comment, it is to be added:
    From the Order of the ITAT it is seen that, both the Parties to the dispute have not – reasons not known, may be unwittingly – brought to the notice of the Bench a very crucial fact; that is, notwithstanding the Domestic law and Tax Treaty provisions, and general expectation, an expatriate, who otherwise in Dubai would have been taxed as a ‘RESIDENT’ of DUBAI, has factually not been/ is not being taxed in Dubai as per the UAE Domestic law.
    Had that been done, most probably, the ITAT Decision could have been diagonally opposite and in favour of the assessee – appellant – Anyone to AGREE!
    The subject Article as first displayed on the website of Taxguru, since edited and modified, has been posted in my Personal blog (swamilook) – look up >

    BLOG Titled, – TAX Treaty (ies) vs Domestic Law @

    KEY Note: In the ITAT Order, if not mistaken, a mention has been made about the possibility of the assessee effecting a transfer of the vested / allotted ESOP shares, later on his return to India, in the context ofdealing with the implications of Article 15 ( DTA relief) . That is an aspect, being equally/ no less important, which might have to be examined in- depth and duly considered viewpoints shared,so as to be of proper guidance to the taxpayers’ community !


  4. vswami says:

    ADDon : In the referred Article, own thoughts and viewpoints have been shared wprt the stance taken by the Revenue and with focus on the pleas addressed on the assessee – appellant’s behalf, on one hand, and the reasoning and grounds of the ITAT Decision on the other. To be precise, the basic assumption has been that HDFC’s Dubai Based employee is liable to pay income – tax on his Employment- / Salary- income in Dubai.

    Those would , however, serve only an academic purpose and pale into insignificance , in case the employee had , in fact, as per the Dubai domestic law, no tax to pay / paid in Dubai for those years of relevance.

    For MORE, attention is drawn to a recent Article , in public domain, >

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December 2023