9911796707
TMI Blog2024 (8) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... e ESOP holder. Since such monetary benefit would typically be realized, albeit notionally, only at the time of exercise of the option and remains a non-monetizable contractual right until then, the fair market price of the shares as on the date of exercise of option is reckoned and the price paid by the option holder is deducted therefrom to determine the value of the perquisite in the form of ESOP. Explanation (c) to clause (vi), therefore, prescribes that the value of the specified security is the difference between the fair market value of the shares on the date of exercise of the option and the price paid by the option holder. Unusually, in the current case, the assessee received a substantial monetary benefit at the pre-exercise stage by way of discretionary compensation for diminution in value of the Stock Options. I move next to the facts so as to examine whether the value of the perquisite can be determined in these circumstances. From the material on record, it is not possible to discern the exercise price under the FSOP 2012. In any event, this is not material because the petitioner has not exercised the Option in respect of any of the 2137 Vested ESOPs. Effectively, no p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivate Limited (FMPL). FMPL is a company incorporated under the laws of Singapore and is a wholly owned subsidiary of Flipkart Private Limited Singapore (FPS). 3. FPS implemented the Flipkart Stock Option Scheme, 2012 (the FSOP 2012). Under the FSOP 2012, employees' stock options (ESOPs) were granted to option grantees, who are either employees or any other persons approved by the Board and to whom stock options were granted. The expression 'employee' was defined in the FSOP 2012 as meaning a permanent employee of a Group Company working in Singapore or outside Singapore; or a director or officer of the Group Company, whether a full time director or officer or not. The expression 'subsidiaries' was also defined in FSOP 2012 as meaning all companies owned and controlled by FPS, including the four entities expressly enumerated in the definition. 4. On 21.04.2023, FPS announced compensation of US Dollar (USD)43.67 per ESOP in view of the divestment of its stake in the PhonePe business, and described such payment as being made although there is no legal or contractual right thereto under the FSOP 2012. Such compensation was payable to all option grantees as on 23.12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was granted 5924 ESOPs and continues to hold the same number of ESOPs today, he contended that there was no transfer of capital assets. In the absence of transfer of capital assets, he further contended that capital gains tax cannot be levied. Put differently, his contention was that the compensation paid to the petitioner was a capital receipt and that capital receipts are taxable as capital gains provided such gains accrued from the transfer of capital assets. Since capital assets were not transferred by the petitioner, he reiterated that capital gains tax cannot be imposed. 8. By adverting to the impugned order, learned senior counsel submitted that it was erroneously held therein that the asset transferred by the petitioner was the relinquishment of the right to sue or litigate. As an ESOP holder, learned senior counsel contended that the petitioner had no right to receive compensation for the divestment of the PhonePe business by FPS. In the absence of a right to receive compensation, he further contended that the payment was a discretionary one time payment by FPS. Even if such compensation had not been paid, he contended that the terms of the FSOP 2012 did not confer any r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 415 (Mad.) (xii) CIT v. David Lopes Menezes, (2011) 336 ITR 337 (xiii) Siemens Public Communication Network (P.) Ltd. v. CIT, Bangalore (2017) 390 ITR 1 (SC) (xiv) Vodafone India Services (P.) Ltd. v. UOI, (2014) 368 ITR 1(Bombay) (xv) CIT v. Deutsche Post Bank Home Finance Ltd., (2014) 265 CTR 525 (Delhi) (xvi) CIT v. Handicrafts and Handlooms Export Corporation of India Ltd. 11. In support of the proposition that capital receipts, which are not chargeable under Section 45 of the I-T Act, cannot be taxed under any other heads, he relied upon the following judgments: (i) CIT v. D.P.Sandhu Brothers Chembur (P) Ltd., [2005] 142 Taxmann 713 (SC) ; (ii) Cadell Weaving Mill Co. (P) Ltd. v. CIT, [2001] 116 Taxman 77 (Bombay) . (iii) CIT v. Vazir Sultan Sons, (1959) 36 ITR 175 (iv) United Commercial Bank Ltd v. CIT, AIR 1957 SC 918 12. He placed reliance on CIT v. B.C.Srinivas Setty, 128 ITR 294 (SC) , for the proposition that capital gains tax cannot be imposed in the absence of a computation mechanism. Baroda Cement Chemicals Ltd. v. CIT, [1986] 25 Taxman 324 (Gujarat) , was relied on by him to contend that a mere right to sue cannot be transferred. For the proposition that tax canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. iv) In contrast to the judgment in K.R.Srinath , the FSOP 2012 does not confer a contractual right on the petitioner to sue for specific performance. The judgment of the Hon'ble Supreme Court in Ahmed G H Ariff and others v. Commissioner of Wealth Tax, AIR 1971 SC 1691, is a wealth tax judgment and, therefore, inapplicable. (v) Since the compensation received by the petitioner was a capital receipt, which was not from the transfer of a capital asset, it cannot be treated as income under any provision of the I-T Act. Discussion, analysis and conclusions: The FSOP 2012 and the petitioner's ESOPs 16. Upon taking stock of the rival contentions, the first aspect that warrants consideration is the FSOP 2012, particularly the relevant clauses thereof. Clause 1.2 specifies that the objective of the FSOP 2012 is to advance the interest of the stakeholders of the Group. Group is defined in clause 2.1.22 as meaning the Company and its Subsidiaries . Company is defined as Flipkart Private Limited, i.e. FPS. The expression Subsidiaries is defined in clause 2.1.34 as under: 2.1.34 Subsidiaries means all companies owned and controlled by the Company including (a) Flipkart India Priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so provides that all the Group employees are eligible for being considered for the grant of Stock Options. On examining the FSOP 2012 in light of the affidavit, without doubt, the petitioner was granted Stock Options as an Employee. PhonePe divestment and compensation 18. As stated earlier, by communication dated 21.04.2023, FPS informed all stakeholders under the FSOP 2012 that it was paying compensation for the divestment of the PhonePe business to all the Option Grantees. For such purpose, it was stated that such compensation was determined by valuing each option at about USD 189.10 prior to the divestment and at about USD 165.83 upon divestment. The said communication, in relevant part, is as under: As you are aware, the Board of Directors (BoD) of Flipkart Private Limited, publicly announced the complete separation of PhonePe business, by selling off its entire shareholding, in Dec 2022. With this announcement, the value of ESOPs granted to all stakeholders (including present and former employees in our subsidiaries in India, Israel, US, Singapore, Saudi Arabia, Egypt, UAE, China, etc.) will drop, along with loss of opportunity to share in future accretion in the value of Phon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alls under the provisions of S.45 As is evident from the above extracts, the first respondent concluded that there was a capital gain arising out of transfer of a capital asset and that this is taxable under Section 45 of the I-T Act. 20. The above conclusions were assailed on the ground that there was no transfer of a capital asset. Specifically, it was contended that the petitioner held 5924 ESOPs before the compensation was paid and continued to hold the same number of ESOPs thereafter. It was also contended that the FSOP 2012 did not confer a right to compensation on the petitioner in case of divestment and, therefore, it cannot be said that there was a relinquishment of a right to sue. Before turning to the tenability of the conclusions in the impugned order, a brief discussion on the nature of ESOPs, including those under the FSOP 2012, is necessary. Nature of ESOPs under the I-T Act 21. The FSOP 2012, as is typical of stock option schemes, provides for the grant of Stock Options and confers on an Option Grantee the right (but not the obligation) to exercise the Option upon the Vesting thereof, and thereby receive shares of the issuing company, FPS, at a pre-determined price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore drawing conclusions on whether ESOPs are capital assets and, more importantly, on the nature of receipts in relation thereto. 23. Several judgments were relied upon by the petitioner to substantiate the contention that the compensation received by him is a capital receipt that cannot be taxed because it did not accrue from the transfer of a capital asset, and some of the said judgments are discussed below. 24. In Kettlewell Bullen , the appellant therein was earlier appointed as the managing agent of Fort William Jute Company Limited. As per the contract, in the event of termination, the managing agent was to receive reasonable compensation for deprivation of office. In that context, the appellant therein relinquished the managing agency subject to receipt of compensation. While holding that the compensation received by the appellant therein was a capital receipt and not a revenue receipt, the Supreme Court observed as follows and differentiated a capital receipt from a revenue receipt: Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh all these cases was that compensation was paid either for the loss of the profit-making apparatus or, at a minimum, for the sterilization thereof. Consequently, such compensation was held to be a capital receipt. 27. At first blush, the ratio of the above cases seems to apply to the case at hand because compensation was paid for the diminution in value of ESOPs and potential losses on account of future accretion to ESOP holders due to the divestment of the PhonePe business. On closer examination, however, the following significant differences are noticeable. As stated earlier, ESOPs - and, in particular, the Stock Options in this case - are contractual rights to receive shares subject to the exercise of the option in terms of the applicable scheme. The terms of the FSOP 2012 include conditions regarding Vesting, cancellation and transfer. Consequently, only in case of breach of the obligation by the issuer to allot shares upon exercise of the Option in terms of the FSOP 2012, the petitioner would have the right to claim compensation or, arguably, to sue for specific performance. ESOPs are, therefore, contractual rights that may qualify as actionable claims (albeit not as define ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and Exercise. Upon considering all the above aspects holistically, I conclude that ESOPs do not fall within the ambit of the expression property of any kind held by an assessee in Section 2(14) and are, consequently, not capital assets. As a corollary, the receipt was not a capital receipt. Since it was concluded in the impugned order that a capital asset was transferred, notwithstanding the above conclusion, I briefly discuss the tenability of said conclusion next. 30. In this case, it is common ground that the petitioner did not exercise the Option in respect of any Vested ESOP and, consequently, shares of FPS were not issued or allotted to the petitioner. As a corollary, the petitioner neither received nor transferred a capital asset. Since the FSOP 2012 does not confer a right to receive compensation for the impairment in the value of ESOPs, both the conclusion in the impugned order and learned senior standing counsel's contention that compensation was paid towards relinquishment of the right to sue by relying on K.R.Srinath is untenable. Given this conclusion, the matter could have been remanded. On instructions, however, learned senior counsel for the petitioner confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; (c) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares; (emphasis added) 33. It is pertinent to notice that salary is defined inclusively to include perquisites and perquisite is also defined inclusively as covering the value of a specified security. The expression specified security is defined exhaustively as securities as defined in Section 2 (h) of the Securities Contracts (Regulation) Act, 1956 and, in the context of ESOPs, as including securities offered under such plan or scheme. The expression employees stock option is defined in Section 2(37) of the CA 2013, as ...the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llotted under such plan or scheme' is not used. The FSOP 2012 is admittedly a stock option plan or scheme within the meaning of Explanation (a) to clause (vi) of subsection (2) of Section 17. Given that the petitioner has not exercised the Option in respect of any of the 5924 ESOPs held by him, shares of FPS were not issued or allotted to him. The inference that follows is that specified security , in the context of ESOPs, is not confined to allotted shares, but includes securities offered to the holder of ESOPs. The use of includes instead of 'means' also indicates that the phrase securities offered under such plan or scheme is not intended to be exhaustive. 36. Clause (vi) clearly refers to the value of the specified security (in this case, value of the ESOP). Pursuant to communication dated 21.04.2023, discretionary compensation was paid to restore status quo ante as regards the value of the ESOP. In my view, the expression value of any specified security... transferred directly or indirectly by the employer ... free of cost or at concessional rate to the assessee in clause (vi) is wide enough to encompass the discretionary compensation paid to ESOP holders to compen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner under the FSOP 2012 as on the record date. Nonetheless, by qualifying as an Employee under the FSOP 2012, the petitioner received compensation at the rate of USD 43.67 per ESOP on all 5924 ESOPs (both Vested and Unvested) held by him as on the record date. 39. In Commissioner of Income Tax, Bangalore v. Infosys Technologies Ltd. [(2008) 297 ITR 167 (SC)], the Supreme Court considered the question whether the issuer company was liable to deduct tax under Section 192 of the I-T Act in respect of shares allotted under an ESOP scheme and subject to a lock-in for five years. The relevant assessment year was 1999-2000 when clause (iii) of sub-section (2) of Section 17 defined perquisite as including inter alia the value of any benefit provided free of cost or at a concessional rate. After noticing that the amendment made to the above provision by the Finance Act, 1999, with effect from 01.04.2000, did not apply retrospectively, it was held that the notional benefit that accrued from shares that were subject to a lock-in cannot be treated as a 'perquisite' because there was no cash inflow to the employees till the end of the lock-in period. While the principle that ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
