The Madras High Court has held that the Flipkart employee retains employee stock ownership plan (ESOP) even after receipt of compensation, receipt to be taxed as salary.
The court ruled that 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”.
The court held that it is unnecessary to consider whether it falls within any other head of income. The compensation qualifies as a perquisite and not a capital receipt.
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.
The petitioner challenged the order rejecting the petitioner’s request for the grant of a certificate of ‘nil’ deduction of tax at source. The petitioner sought a consequential direction to the first respondent to issue a certificate of ‘nil’ deduction of tax at source under Section 197 of the Income-tax Act, 1961.
Arguments
The petitioner contended that he was an employee of FIPL when the compensation was paid and that the said entity is a step down subsidiary of FPS. ESOPs are rights in relation to the shares of the entity – in this case, FPS- issuing such options. As a result,ESOPs should be treated as capital assets. By pointing out that the petitioner was granted 5924 ESOPs and continues to hold the same number of ESOPs today, 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. 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.
The department contended that ESOPs are capital assets and that such ESOPs had a higher value while FPS held an interest in PhonePe. Upon divestment of the PhonePe business by FPS, he submitted that the value of ESOPs, including those held by the petitioner, declined. As a consequence, he contended that the petitioner had the right to sue for diminution of value. Since the compensation was paid as consideration for relinquishment of the right to sue, he contended that such relinquishment qualifies as the transfer of a capital asset.
Conclusion
The court held that the petitioner is not entitled to a ‘nil’ certificate of deduction. In effect, although the basis for the conclusion in the impugned order is flawed, the rejection of the request for a ‘nil’ certificate of deduction is affirmed.
Case Details
Case Name: Nishithkumar Mukeshkumar Mehta Versus Deputy Commissioner of Income Tax
Citation: W.P.No.26506 of 2023
Court: Madras High Court
Judge: Justice Senthilkumar Ramamoorthy
Decision Date: 31/07/2024
