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TMI Blog2021 (1) TMI 558X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment year 2013-14. 2. Grievances raised by the appellant, which, it may also be added, are common in both the years before us, are as follows: 1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (A) has erred in upholding the action of the learned Assessing Officer to tax Employee Stock Option as perquisite u/s 17. 2. Without prejudice to above, on the facts and in the circumstances of the case and in law, the CIT(A) has erred in concluding that the Appellant is not entitled for relief from taxability of perquisite in the form of Employee Stock Options, under the provisions of Section 90 of the Act read with Double Taxation Avoidance Agreement between India and UAE ('DTAA'); 3. The assessee before us is an individual. He is an employee of HDFC Bank Limited, Mumbai, and currently on deputation to HDFC Bank Representative Office in Dubai. He is stated to be working in Dubai, U.A.E., since 1st October 2007. The status of the assessee, so far as the present assessment year is concerned, is of the non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in U.A.E., and, therefore, shall not accrue or arise in India (Extracts from letter dated 9th March 2016, relevant reproductions at page 4 of the assessment order)". A reference was then made to the deeming fiction under section 9(1)(ii). A large number of judicial precedents were also referred to, and finally it was submitted that:- "In the light of the above facts on record and binding judicial precedents on the subject, we humbly submit that the income in the nature of ESOP benefits earned by the assessee in captioned AY does not fall in any of the expressions which is sine qua non for taxability under section 5(2) of the Act, and consequently, ESOP provisions cannot be taxed under the provisions of the Act. We, therefore, request yourself to kindly accept the aforesaid tax position of the assessee, as filed in the return of income w.r.t ESOP perquisite and release the refund as claimed by the assessee alongwith interest due under section 244A of the Act" 4. The assessee then made an alternative submission on treaty protection under the India U.A.E. Double Taxation Avoidance Agreement [(1993) 205 ITR (Statutes) 49; Indo U.A.E. tax treaty, in short]. This claim of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the respective Model Tax Conventions. The treatment of employee stock-options has been explained in Para 12.1 to Para 12.15 to the 2014 Edition of Commentary on OECD Model Tax Convention and the UN has accepted the said treatment of employee stock-options. Further, India in Its comments to the aforesaid paras in the commentary on the subject, has not raised any reservations and/or objections, thereby impliedly accepting the tax treatment of employee stock options, provided therein. As, India has accepted the said position and In light of principle of contemporaneous exposition, it is binding on the Income-tax department to accept the treatment of employment stock-options; 10. The treatment of employment stock-options as provided in the above paras are duly followed and complied in the Return of Income filed by the assessee and support the tax position of the assessee of non-taxability of ESOP benefits as per Article 15(1) India-UAE DTAA; and 11. Therefore, we humbly submit that the1 ESOP benefits earned by the assessee over the financial years by rendering employment service in UAE shall not be taxed in India as per Article 15(1) of India-UAE DTAA. 12. The aforesaid pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, either such an income must accrue or arise or is deemed to accrue or arise, in India, or such an income must be received or must be deemed to be received in India by such year by or on behalf of the non-resident assessee. It is for this reason that we have to properly appreciate the connotations of expression "income accruing or arising in India". In Hon'ble Supreme Court's oft quoted landmark judgment in the case of E D Sassoon & Co Ltd Vs C.I.T. [(1954) 26 I.T.R. 27 (S.C.)], Their Lordships have, inter alia, observed as follows: ..........nor the words "is received", "accrues" and "arises" have been defined in the Act. .............Mukerji, J., has defined these terms in Rogers Pyatt Shellac & Co. v. Secretary of State for India [1925] 1 I.T.C. 363: "......... 'Accrues', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes it's meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were granted to the assessee in 2007 and in consideration for the services which were rendered by the assessee prior to the rights being granted- which were rendered in India all along. The character of income may be inchoate at that stage but certainly what is being sought to be taxed now, on account of the specific provision under section 17(2)(vi), is a fruit of services rendered much earlier and the benefit, which has now become a taxable income, accrued to the assessee in 2007. All that section 17(2)(vi) decides is the timing of an income, but it does not dilute or negate the fact that the benefit, in which is being sought to be taxed, had arisen much earlier i.e. at the point of time when the ESOP rights were granted. On these facts, in our considered view, 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 poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relate back to the source jurisdiction, i.e, the jurisdiction in which relates services were rendered, as it observes that "While it is clear that the granting of an employee stock-option constitutes part of the remuneration of the employee for purposes of Article 15, some commentators have considered that the holding and subsequent exercise of the option constitute investment decisions and that the gain represented by the difference between the value of the option at the time it is exercised and the value of the option at the time it was granted, constitutes a capital gain falling under Article 13, which does not allow source taxation of the gain, rather than under Article 15, which would (emphasis, by underlining, supplied)". 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated 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-à-vis the employment, the nexus is also required between other similar benefits vis-à-vis the employments; what hold goods for the former ..... X X X X Extracts X X X X X X X X Extracts X X X X
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