Employee Stock Options granted by foreign employer is liable to tax ...

Vol. 8 Issue 8.1 Aug 06, 2013
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Employee Stock Options granted by foreign employer is liable to tax in
proportion to the period of services rendered in India: Delhi Tribunal
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.
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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:
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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
Nitin Baijal
Shipra Srivastava
Mukesh Butani, New Delhi
+91 124 339 5010
mukesh.butani@bmradvisors.com
Rajeev Dimri, New Delhi
+91 124 339 5050
rajeev.dimri@bmradvisors.com
Gokul Chaudhri, New Delhi
+91 124 339 5040
gokul.chaudhri@bmradvisors.com
Bobby Parikh, Mumbai
+91 22 3021 7010
bobby.parikh@bmradvisors.com
Abhishek Goenka, Bangalore
+91 80 4032 0100
abhishek.goenka@bmradvisors.com
[1] ITA Nos. 1174 & 1175 (Delhi) of 2005, dated 15-2-2008
[2] ITA No. 1308 of 2008, dated 16-12-2009
[3] [2008] 112 ITD 1 (Mum)

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.
Sriram Seshadri, Chennai
+91 44 4298 7000
sriram.seshadri@bmradvisors.com
Amit Jain, Pune
+91 20 65212105
amit.jain@bmradvisors.com
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.
Sumeet Hemkar, Singapore
+65 6408 8004
sumeet.hemkar@bmradvisors.com
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.
BMR Comments
The Delhi ITAT ruling has enunciated the principle as has been promulgated earlier
by the Delhi ITAT in the case of Ellin ‘D’ Rozario. The ruling clearly brings out the
principle that the perquisite value of stock options would be liable to tax in India to
the extent relatable to services rendered in India.
While ruling on the aspect, the Delhi ITAT has relied on the principle which was
brought out under the abolished regime of FBT and also, the principles enunciated
by the OECD.
This ruling would provide significant relief to several expatriates working in India on
assignment, and who may exercise their stock options while on assignment in
India.
______________________
[1] ITA Nos. 1174 & 1175 (Delhi) of 2005, dated 15-2-2008
[2] ITA No. 1308 of 2008, dated 16-12-2009
[3] [2008] 112 ITD 1 (Mum)
[4] ITA No. 2918 (Delhi) of 2005, dated 5-12-2008
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[4] ITA No. 2918 (Delhi) of 2005, dated 5-12-2008

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