2014 (1) TMI 647 - AT - Income Tax

Addition on account of Employee stock option scheme Amount to be taxed in India Held 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 - 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 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. Addition on account of hypo tax - Held that - Following CIT vs. Dr.Percy Batlivala 2009 (12) TMI 811 - DELHI HIGH COURT Tax equalization policy provides that the company shall bear assessee s tax liability arising out of his foreign assignment - But company s liability will be restricted only to the extent of additional liability over and above that would have arisen had the assessee been in USA - if the assessee had no foreign assignment in India for which he is to be compensated by net of tax salary - the income arising in India is actual salary plus the incremental tax liability arising on account of Indian assignment - the claim of the revenue rejected Decided against Revenue.

Summary

Issues:
1. Taxability of stock options and ESOP perquisites.
2. Tax treatment of hypo tax.
3. Addition on account of unfurnished accommodation and value of tax perquisite.

Detailed Analysis:

1. Taxability of Stock Options and ESOP Perquisites:
The case involved an appeal by the Revenue against the order of the CIT(A)-XXX, Delhi concerning the Assessment Year 2007-08. The dispute centered around the tax treatment of Employee Stock Options (ESOPs) granted to an employee who was on deputation to the Indian liaison office of a US-based company. The employee had exercised the stock options while on assignment in India, leading to a disagreement on the portion of the benefit taxable in India. The Assessing Officer taxed the entire perquisite amount, but the First Appellate Authority held that only the proportionate amount attributable to the period spent in India should be taxed. The Tribunal upheld the CIT(A)'s decision, citing precedents and distinguishing between stock options and stock appreciation rights. The judgment emphasized that only the portion of the ESOP benefit related to services rendered in India during the grant period should be taxed.

2. Tax Treatment of Hypo Tax:
Another issue in the case pertained to hypo tax, which is the hypothetical tax liability calculated under a tax equalization policy to ensure employees on international assignments do not suffer undue tax burdens. The Commissioner of Income Tax (Appeals) relied on a Delhi High Court decision and allowed the exclusion of hypo tax from the employee's taxable salary. The Tribunal upheld this decision, noting that the hypo tax amount, which was not received by the employee, should not be considered as part of the taxable salary. The judgment highlighted the employer's obligation to pay the actual taxes incurred by the employee and the exclusion of hypo tax from the employee's base salary.

3. Addition on Account of Unfurnished Accommodation and Tax Perquisite:
Ground no. 5 of the appeal dealt with the addition made on account of unfurnished accommodation and the value of tax perquisite. Both parties agreed that this issue was consequential to the decision on hypo tax. As the Tribunal had already dismissed the Revenue's appeal regarding hypo tax based on the Delhi High Court decision, the addition on account of unfurnished accommodation and tax perquisite was also dismissed. The judgment concluded that this issue was linked to the previous decision and therefore should be dismissed accordingly.

In summary, the Tribunal's judgment addressed the taxability of stock options and ESOP perquisites, the treatment of hypo tax, and the addition related to unfurnished accommodation and tax perquisite. The decision provided detailed analysis, citing relevant legal precedents and applying principles to determine the appropriate tax treatment in each scenario.