2021 (1) TMI 558 - AT - Income Tax

Accrual of income in India - Taxation of ESOP benefit - CIT-A upholding the action of AO to tax Employee Stock Option as perquisite u/s 17 - HELD THAT - The income even if it was inchoate at the point of time when the options were granted has accrued and has arisen in India. The assessee is a non-resident in the current assessment year but quite clearly the benefit in respect of which the income is bring sought to be taxed now had arisen at an earlier point of time in India. Viewed thus the income in respect of ESOP grant benefit accrued and had arisen at the point of time when the ESOP rights were granted even though the taxability in respect of the same on account of the specific legal provisions under section 17(2)(vi) has arisen in the present in this year. If grant of stock option is the part of remuneration as observed in this OECD publication and rightly so it accrues a benefit when these options are granted and the said benefit accrues in the jurisdiction in which the qualifying services are rendered. In our humble understading therefore the action of the Assessing Officer in bringing the said income to tax in the hands of the assessee in the present assessment year even though the status of the assessee in the present assessment year was non-resident cannot be faulted. ESOP benefit in question were only taxable in U.A.E. as the said income is protected by Article 15 of the Indo U.A.E. tax treaty and as the assessee was a resident of the U.A.E. in the relevant assessment year - Scheme of Article 15 permits taxation of ESOP benefit which is included in the scope of the expression other similar remuneration appearing immediately after the words salaries and wages in the jurisdiction in which the related employment is exercised. Thus in case the assessee is to get ESOP benefits in respect of his service in U.A.E. and he exercises these options at a later point of time say after returning to India and ceasing to be a non-resident he will still have the treaty protection of that income under article 15(1). This principle however is not a one-way route. Conversely when the assessee gets the ESOP benefit on account of rendering services in India he cannot have the benefit of article 15 in respect of the said income. The reason is simple. Article 15(1) itself provides that salaries wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State and so far as the other similar benefits are concerned which include the ESOP benefits the employment is exercised in the other contracting State i.e. in India. As much as the nexus is required to be between salaries and wages vis- -vis the employment the nexus is also required between other similar benefits vis- -vis the employments; what hold goods for the former holds good for the latter as well. In the absence of nexus of other similar benefits as wages and salaries received by the assessee vis- -vis his employment in the U.A.E. the treaty protection of the said income in India cannot be available to a resident of the U.A.E. Thus 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 - The assessee s claim for the treaty protection is thus equally devoid of legally sustainable merits and we reject the same. - Decided against assessee.

Summary

Issues Involved:
1. Taxation of Employee Stock Option Plan (ESOP) benefits as perquisites under Section 17 of the Income Tax Act, 1961.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and UAE for relief from taxability of ESOP perquisites.

Issue-wise Detailed Analysis:

1. Taxation of ESOP Benefits as Perquisites under Section 17:
The main issue in these appeals concerns the taxation of ESOP benefits received by the assessee, an employee of HDFC Bank Limited, currently on deputation to HDFC Bank Representative Office in Dubai. The assessee exercised ESOP options granted in 2007, which vested in 2008 and 2009, leading to a perquisite value of ?72,77,320 for the assessment year 2013-14. The assessee contended that the ESOP benefits should not be taxed in India as they were received for services rendered in Dubai. However, the Assessing Officer and the CIT(A) upheld the taxation of these benefits in India under Section 17(2)(vi) of the Income Tax Act, 1961, as the options were granted for services rendered in India in 2007.

The Tribunal agreed with the lower authorities, stating that the income from ESOP benefits accrued when the options were granted in 2007 for services rendered in India, even though the taxability arose in the year the options were exercised. The Tribunal referred to the Supreme Court's judgment in E D Sassoon & Co Ltd Vs CIT, emphasizing that the accrual or arising of income represents a state anterior to the point of time when the income becomes receivable. Thus, the ESOP benefits, though taxed when exercised, accrued in India when the options were granted.

2. Applicability of DTAA between India and UAE:
The assessee alternatively claimed relief under Article 15 of the India-UAE DTAA, arguing that the ESOP benefits should be taxable only in the UAE as the employment services were rendered there. Article 15(1) of the DTAA states that salaries, wages, and other similar remuneration derived by a resident of a contracting state (UAE) in respect of employment shall be taxable only in that state unless the employment is exercised in the other contracting state (India).

The Tribunal noted that the ESOP benefits were granted for services rendered in India, and thus, the nexus required under Article 15(1) was not satisfied. The Tribunal referred to the UN Model Convention Commentary and OECD publications, which suggest that ESOP benefits relate back to the period when the options were granted. Therefore, the ESOP benefits were taxable in India as they were granted for services rendered in India.

The Tribunal also distinguished the assessee's case from other judicial precedents cited, such as ACIT Vs Robert Arthur Kultz and Anil Bhansali Vs ITO, where the ESOP benefits were related to services rendered outside India. In the present case, the services were rendered in India, and thus, the treaty protection under Article 15(1) was not applicable.

Conclusion:
The Tribunal upheld the conclusions of the lower authorities, confirming the taxability of the ESOP benefits in India under Section 17(2)(vi) of the Income Tax Act, 1961, and rejecting the assessee's claim for relief under the India-UAE DTAA. Both appeals were dismissed.