The
Delhi Bench of the Income Tax Appellate Tribunal (“ITAT”) has delivered an
important ruling in the case of Robert Arthur Keltz (“the taxpayer”). The ITAT
has held that only that portion of employee stock options would be liable to tax
as a perquisite in India which is relatable to the services rendered by the
taxpayer in India, and not pertaining to the whole grant period.
In this
special edition of BMR Edge, we have summarized the facts of the case and the
ruling of the ITAT.
Facts of
the case
The
taxpayer, an employee of United Technologies International Operation, USA
(“UTIO”), was deputed to its Indian Liaison Office wef April 1, 2006 under a tax
equalization policy. Such a policy ensured that the taxpayer does not pay
excess taxes (ie, over and above the taxes (“hypo tax”) that he would pay had he
continued to stay in his home country) in the host country due to the
commencement of international assignment. As part of the tax equalization
policy, the employer calculated a hypo tax and excluded the same from the
employee’s pay.
Further,
he was granted options of 34,000 shares on January 9, 2004 by UTIO, when the
taxpayer was outside India. The stock options had a vesting period of 3 years
i.e.
from
January 9, 2004 to January 9, 2007. The options vested partially and were
exercised by the taxpayer during the period of his Indian assignment.
The
taxpayer being a resident and not ordinarily resident during the concerned tax
year while filing his return of income offered to tax the amount of
proportionate stock perquisites earned in India. Also, by the virtue of tax
equalization policy, the taxpayer has excluded the amount of hypo tax from his
salary.
The
Assessing Officer (“AO”) rejected the claim of the taxpayer and brought to tax
the entire perquisite value of stock options when the options were exercised
while he was in India. In addition, the AO has also added back the amount of
hypo tax to the base salary of the taxpayer.
Appellate
Commissioner’s ruling
Aggrieved
by the order of AO, the taxpayer preferred an appeal before the Commissioner of
Income Tax (Appeals) [“CIT (A)”] who reversed the AO’s order upholding the claim
of the taxpayer. The key observations of the CIT (A) order were as
follows:
·
In
relation to the stock options, the taxpayer had been in India for only a part of
the time of the vesting period and therefore, only the proportionate stock
option benefit which is attributable to the period spent in India was chargeable
to tax in India. Reliance was placed on the ruling of Eric Morquxer and
Ghorayed Emile[1] ,
circular no. 9 / 2007 dated December 20, 2007 pertaining to the Fringe Benefit
Tax (“FBT”) regime and OECD guidance report on treatment of stock options to
support his view.
·
The
disallowance on account of hypo tax was rejected by relying on the Delhi High
Court (“HC”) ruling in the case of CIT v. Dr. Percy Batlivala.[2]
Aggrieved
by CIT (A)’s order, the AO filed an appeal before the Delhi
ITAT.
Revenue’s
contentions
The key
contentions of Revenue are summarized below:
·
The
whole perquisite amount on account of stock options should be liable to tax in
India. Reliance was placed in the ruling of Sumit Bhattacharya[3] , a
decision of Special Bench of the Mumbai ITAT. The ruling principally
distinguished stock options from stock appreciation rights. Also it was held,
that the benefit which the employee would get on the date of exercising the
option to purchase the shares would be liable to tax as a perquisite. The
value of such perquisite would be the difference between market price of 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.
·
Hypo tax
forms part of the taxpayer’s taxable salary on the understanding that income has
already accrued to him and no specific exemption or deduction has been granted
for hypo tax under the Income-tax Act, 1961.
Taxpayer’s
contentions
The key
contentions of taxpayer are summarized below:
·
The
shares were allotted to the taxpayer outside India and thus, the benefit arising
there from cannot be deemed to be received in India.
·
The
stock option benefit does not accrue or arise or deemed to accrue or arise to
the taxpayer in India since the options granted represents a future right of the
taxpayer to receive the shares of UTIO, once the vesting condition is complied
with. In other words, the employee should continue his employment over the
vesting period. In case the vesting condition is not met then the options would
lapse.
·
Since,
the taxpayer has been in India only for a part of the time of the vesting
period, only a proportionate stock option benefit which is attributable to the
period spent in India accrues to the taxpayer.
ITAT’s
ruling
The Delhi bench of
ITAT has ruled in favour of the taxpayer holding as under:
·
Since
the taxpayer has not rendered service in India for the whole grant period, only
such portion of the perquisite value of stock options would be taxable in the
hands of the taxpayer which is related to the period of his Indian assignment.
·
Placing
reliance on the principal laid down in the ruling of ACIT v. Ellin ‘D’
Rozario[4], it was held that
only proportionate salary would be liable to tax in India if a part of the
activity done by the taxpayer has no relation to any India specific job or
activity.
·
With
regard to the addition made on account of hypo tax, the findings of the CIT (A)
were allowed by following the Delhi HC judgment in the case of Dr. Percy
Batlivala.
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