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New ruling on taxation of foreign employee stock options

13 Aug 2013

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has delivered an important ruling in the case of Robert Arthur Keltz (the taxpayer). The ITAT has held that only a portion of employee stock options would be liable to tax relatable to the services rendered by the taxpayer in India, and not pertaining to the whole grant period. Taxand India summarises the facts of the case and the ruling of the ITAT.

The taxpayer, an employee of United Technologies International Operation, USA, was deputed to its Indian Liaison Office under a tax equalisation policy. Such a policy ensured that the taxpayer didn't pay excess taxes (ie over and above the taxes (hypo tax) that he would pay had he continued to stay in his home country) due to the commencement of international assignment. As part of the tax equalisation policy, the employer calculated a hypo tax and excluded the same from the employee’s pay. Further the taxpayer was granted options of 34,000 shares when he was outside India. The stock options had a vesting period of 3 years but were vested partially and exercised by the taxpayer during his Indian assignment.  
The taxpayer, while filing his return of income, offered to tax the amount of proportionate stock perquisites earned in India. Also, by the virtue of tax equalisation policy, the taxpayer had excluded the amount of hypo tax from his salary. The Assessing Officer (AO) rejected the claim of the taxpayer and brought to tax the entire perquisite value of stock options when the options were exercised while he was in India. In addition, the AO has also added back the amount of hypo tax to the base salary of the taxpayer. 

The taxpayer brought the case to the Commissioner of Income Tax who upheld his claim. Aggrieved by this the AO filed an appeal before the Delhi ITAT. The AO stated that hypo tax forms part of the taxpayer’s taxable salary on the understanding that income was already accrued to him and no specific exemption or deduction has been granted for hypo tax under the Income-tax Act 1961. However the taxpayer stated that the shares were allotted outside India and therefire, the benefit cannot be deemed to be received in India.

The Delhi bench of ITAT has ruled in favour of the taxpayer holding that since the taxpayer has not rendered services in India for the whole grant period, only such portion of the perquisite value of stock options would be taxable in the hands related to the period of his Indian assignment. 

Discover more: New ruling on taxation of foreign employee stock options

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Mukesh Butani
T. +91 124 339 5010

Taxand's Take

The Delhi ITAT ruling has enunciated the principle as has been promulgated earlier by the Delhi ITAT in the case of Ellin ‘D’ Rozario.  The ruling clearly brings out the principle that the perquisite value of stock options would be liable to tax in India to the extent relatable to services rendered in India.  
While ruling on the aspect, the Delhi ITAT has relied on the principle which was brought out  under the abolished regime of FBT and also, the principles enunciated by the OECD.        
This ruling would provide significant relief to several expatriates working in India on assignment, and who may exercise their stock options while on assignment in India.  

Taxand's Take Author

Mukesh Butani
Taxand Board member