2018 (8) TMI 343 - AT - Income Tax

TDS u/s 192 - value of the perquisite - value of ESOP transaction - Non-compete fee - Held that - The ex-employee has a right to exercise, once he exercises the option, the price of the shares are freezed. That means, the exercise of the option is only acceptance of the proposal as per the scheme 2007. The proposal comes with the obligation i.e. with conditions of such exercise of option. Once the option is exercised, the company which allots the shares has certain obligation on their part to safeguard their interest. The allotment cannot be completed without receiving the full price of the shares. In the given case, mere receipt of the price agreed is not enough but to receive the cost of shares exercised along with the withholding tax. These are obligations on the part of person exercising the opinion. This transaction will come to an end as and when the person exercising the option also completes his part of commitment. Mere exercise of the option is not enough, it is only initial acceptance of right or proposal, which comes with certain commitments. As and when the commitment is complete, the proposal said to be accepted. The goal post of acceptance shifted until completion of the commitment which comes along with the scheme. As submitted by AR, the provisions of section 192 is applicable only on payment basis not on accrual basis. The value of the perquisite can be determined as per section 17(2)(vi) of the Act but is taxable only when the assessee makes the payment, in this case, allotment of shares. In case, it is accepted the contention of ld. CIT(A) that separation agreement should not be used to defer the tax liability, the company allots the shares and pays the withholding tax. Then, the company allots the shares without receiving full consideration on such shares. In case, Mr. Vikram fails to comply with the separation agreement, the company cannot cancel the allotment of shares. Therefore, the assessee has to safeguard its interest first. Coming to other argument that withholding tax should have been paid against the non-compete fee, in our view, the non-compete fee is not accrued in this AY, it is also the findings of ld. CIT(A). Therefore, the amended provision as per section 17(2)(vi) is only to determine the value of ESOP transaction and the obligation for withholding tax accrues only when the shares are allotted after completion of commitments on the part of the person who exercised the option. Mere exercise of acceptance is only acceptance of general proposal. Accordingly, grounds raised by the assessee on this are allowed.

Summary

Issues:
1. Tax withholding on ESOP perquisite
2. Tax withholding on non-compete fee
3. Interest levied under section 201(1A) of the Act
4. Interpretation of Section 192 and Section 17(2)(vi) of the Act
5. Validity of Separation Agreement

Analysis:

1. Tax Withholding on ESOP Perquisite:
The Appellate Tribunal considered the case of a company engaged in granting micro loans in rural areas and its tax withholding obligations on ESOP perquisites. The Tribunal reviewed the provisions of Section 192 and Section 17(2)(vi) of the Act to determine the timing of tax withholding. It was established that the withholding obligation arises only upon the allotment of shares pursuant to an ESOP plan. The Tribunal emphasized that the value of the perquisite is determined based on the Fair Market Value of shares at the date of exercise, and the withholding obligation is triggered upon share allotment.

2. Tax Withholding on Non-Compete Fee:
Regarding the tax withholding on the non-compete fee, the Tribunal examined the accrual of income and found that the fee did not accrue in the relevant assessment year. Therefore, the Tribunal concluded that withholding tax obligations did not apply to the non-compete fee for that year.

3. Interest Levied under Section 201(1A) of the Act:
The Tribunal addressed the interest levied under section 201(1A) of the Act. It upheld the interest on ESOP perquisites but deleted the interest on the non-compete fee. The Tribunal's decision was based on a thorough analysis of the facts and legal provisions governing interest levies in such cases.

4. Interpretation of Section 192 and Section 17(2)(vi) of the Act:
The Tribunal delved into the interpretation of Section 192 and Section 17(2)(vi) of the Act to determine the timing of tax withholding on ESOP perquisites. It emphasized that the withholding obligation arises upon share allotment and not at the exercise of the ESOP option. The Tribunal provided a detailed analysis of the legal provisions and their application to the case at hand.

5. Validity of Separation Agreement:
The Tribunal examined the validity of the Separation Agreement used by the company to defer tax liability. It was observed that the agreement was essential to safeguard the interests of the company, ensuring that obligations were met before share allotment. The Tribunal highlighted that the agreement did not defer tax liability but rather ensured compliance with necessary conditions before the completion of the transaction.

In conclusion, the Appellate Tribunal allowed the appeal of the assessee, emphasizing the importance of understanding the legal provisions governing tax withholding on ESOP perquisites and non-compete fees. The detailed analysis provided clarity on the timing of withholding tax obligations and the validity of agreements in ensuring compliance with tax laws.