The Madras High Court ruled that the compensation received on account of diminution in ESOP value is taxable as perquisite and not capital gains.
The tribunal noted that the Clause 1.2 specifies that the objective of the FSOP 2012 is to advance the interest of the stakeholders of the Group. “Company” is defined as Flipkart Private Limited, i.e. FPS.
The tribunal observed that 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. In effect, the FSOP 2012 confers rights in relation to shares, albeit exercisable subject to the terms and conditions specified therein. Being rights by way of options, the Option Grantee could choose not to exercise the Option upon the Vesting thereof.
The court observed that 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 payments were made by 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.
The court further observed that the Supreme Court in Commissioner of Income Tax, Bangalore v. Infosys Technologies Ltd., 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 a notional benefit cannot be taxed as a perquisite was formulated in a specific statutory context which no longer exists, the broader principle laid down therein to the effect that the benefit from the ESOP is to be determined for purposes of, and as a prerequisite for, taxation as a perquisite continues to apply.
The bench said that the actual monetary benefit was received at the pre-exercise stage by the petitioner and other stakeholders. Such monetary benefit was undoubtedly paid to the petitioner on account of being an ESOP holder at the rate of USD 43.67 per ESOP on all 5924 ESOPs held by him.
“For reasons discussed earlier, these ESOPs were clearly granted to the petitioner as an Employee under the FSOP 2012. If payments had been made by the petitioner in relation to the ESOPs, it would have been necessary to deduct the value thereof to arrive at the value of the perquisite. Since the petitioner did not make any payment towards the ESOPs and continues to retain all the ESOPs even after the receipt of compensation, the entire receipt qualifies as the perquisite and becomes liable to be taxed under the head “salaries”. In view of the above conclusion, it is unnecessary to consider whether it falls within any other head of income”, the court observed.
Facts
The petitioner is an employee of Flipkart Internet Private Limited (FIPL), which is a company incorporated in India and a wholly owned subsidiary of Flipkart Marketplace Private Limited (FMPL). FMPL is a company incorporated under the laws of Singapore and is a wholly owned subsidiary of Flipkart Private Limited Singapore (FPS).
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.
FPS determined the compensation by valuing each option at about USD 189.10 prior to the divestment and at about USD 165.83 upon divestment. As the grantee in respect of 5924 ESOPs, the petitioner received USD 258,701.08 which is equivalent to INR 2,09,54,787.48/-.
Such compensation was paid to the petitioner by deducting tax at source under Section 192 of the I-T Act by treating it as falling under the head “salary”.
On the basis that the amount received as compensation was a capital receipt, which is not liable to income-tax, the petitioner applied for a ‘nil’ tax deduction certificate under Section 197 of the I-T Act for financial year 2023- 24 on 09.05.2023. Such application was rejected by impugned order dated 12.07.2023.
Conclusion
The bench concluded that the compensation qualifies as a perquisite and not a capital receipt.
The bench held that the petitioner is not entitled to a ‘nil’ certificate of deduction. In effect, although the basis for the conclusion in the order is flawed, the rejection of the request for a ‘nil’ certificate of deduction is affirmed.
Case Details
Case Name: Nishithkumar Mukeshkumar Mehta v/s Deputy Commissioner of Income Tax
Citation: W.P.No.26506 of 2023 & WMP Nos.25911 & 25912 of 2023
Court: Madras High Court
Judges: Senthilkumar Ramamoorthy