The Dispute Resolution Panel says that because ESOP expenditure is allowable to the employer at vesting, the perquisite must be taxable in the employee's hands at vesting too, and has disallowed our stock compensation cost because we deducted only on exercise. Is there authority on that?
There is one order on stage one — the perquisite that arises on employee share benefits — and it went against the Panel, but a practitioner should read it with care. It concerns the Panel's argument that the employee's charge follows the employer's deduction to the vesting date. The Bangalore Tribunal allowed the assessee's ground and deleted the disallowance of Rs 65,23,426 of stock compensation expense. Its stated reason, however, rests on the Supreme Court's decision in CIT v. Infosys Technologies Ltd., which construed the law as it stood before 1 April 2000, and the concluding paragraph contradicts itself on whether that decision applies. The value of the order is that the Panel's vesting theory did not prevail; its reasoning is not a foundation for advice.
Decided by the ITAT (Shri N.V. Vasudevan, Vice-President and Shri Chandra Poojari, Accountant Member (Income Tax Appellate Tribunal, Bangalore Benches 'B')) on 2020-04-27, reported as IT(TP)A No. 692/Bang/2017 and IT(TP)A No. 2861/Bang/2017, assessment years 2012-13 and 2013-14 (ITAT Bangalore). It bears on section 17(2)(vi), section 17(2)(iiia), section 40(a)(ia), section 192, section 37(1), section 15 of the Income Tax Act 1961, in Deductions & Disallowances, Salary & Perquisites, TDS Defaults and Assessment & Scrutiny matters.
The Panel's argument is a real one and it is being made. It runs: the Special Bench in Biocon holds the discount is allowable to the employer over the vesting period; the same transaction cannot be an ascertained expense in the company's hands and no income in the employee's; therefore the perquisite is taxable to the employee at vesting, and if the employer did not deduct then the expenditure must be disallowed under s.40(a)(ia). The employer's ground in answer was that under s.17 perquisite taxation arises only at the time of EXERCISE of the option. The Tribunal allowed that ground. But it did so on the footing that CIT v. Infosys Technologies Ltd. applied, and that decision turned on the absence, before 1 April 2000, of any mechanism for valuing the option — a gap that Explanation (c) to s.17(2)(vi) and Rule 3(8) have since filled. Paragraph 16.1 first says the Supreme Court ratio "cannot be applied for the assessment year 2011-2012" and then, three sentences later, that it "is squarely applicable to the facts of the case"; and the sentence in which the Tribunal states its conclusion says the shares "could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised", which cannot be right for a year in which s.17(2)(vi) and Rule 3(8) were both in force. Use the order for what it decided — the disallowance went — and not for what its language appears to say about whether an ESOP is a perquisite at all.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee's ultimate holding company, NXP Semiconductors N.V., had introduced stock-based compensation plans in 2007 under which certain employees of the Indian company were granted options and restricted stock units. Following the ICAI's Guidance Note on accounting for employee share based payments, the Indian company measured the stock compensation cost using the fair value method and amortised it over the vesting period, recognising a provision of Rs 65,23,426 for the year ended 31 March 2012 and claiming it as an allowable expenditure. It also stated that the provision had been reversed in financial year 2014-15 and offered to tax. The Assessing Officer disallowed the expense on the ground that tax had not been deducted at source on the perquisite taxable in the employees' hands. The assessee's ground was that under s.17 perquisite taxation arises only at the time of exercise of the option. The Dispute Resolution Panel took the view that since the Special Bench decision in Biocon holds the expenditure allowable at vesting, by corollary the income becomes taxable in the employees' hands at vesting, so that if the employer had not treated the perquisite amount at vesting as salary and deducted tax on it, the expenditure was to be disallowed under s.40(a)(ia).
Ground No. 12 was allowed and the appeal in IT(TP)A No. 692/Bang/2017 was partly allowed for statistical purposes (paras 16.1 and 17). The Tribunal held that "the element of shares to employees under ESOP could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised" (para 16.1). The practical effect was that the disallowance of the stock compensation expense, which the Dispute Resolution Panel had rested on the proposition that the employee is charged at vesting, was not sustained.
The Tribunal took the view that a similar issue had come before the Supreme Court in CIT v. Infosys Technologies Ltd. [(2008) 297 ITR 167 (SC)] and reproduced that judgment at length, including its holdings that clause (iiia) inserted in s.17(2) by the Finance Act 1999 with effect from 1 April 2000 was not clarificatory or retrospective, that until 1 April 2000 the value of the option was not ascertainable in the absence of a definition of "cost", that a potential benefit could not be treated as income where the shares were subject to a lock-in period, and that estimation of tax deductible under s.192 in the absence of clear provisions on valuation of the perquisite would not justify treating the employer as an assessee in default (para 16). It then recorded that the Supreme Court had not expressed any opinion on the law prevailing after 1 April 2000, stated in one sentence that the ratio could not be applied for assessment year 2011-2012, noted that s.17(2)(iiia) was amended with effect from 1 April 2000 but deleted by the Finance Act 2000 with effect from 1 April 2001, and then stated that the Supreme Court's judgment was squarely applicable, on which footing it allowed the ground (para 16.1).
Accordingly, we hold that the element of shares to employees under ESOP could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised.
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Handle my notice → Ask a CA on WhatsAppThere is one order on stage one — the perquisite that arises on employee share benefits — and it went against the Panel, but a practitioner should read it with care. It concerns the Panel's argument that the employee's charge follows the employer's deduction to the vesting date. The Bangalore Tribunal allowed the assessee's ground and deleted the disallowance of Rs 65,23,426 of stock compensation expense. Its stated reason, however, rests on the Supreme Court's decision in CIT v. Infosys Technologies Ltd., which construed the law as it stood before 1 April 2000, and the concluding paragraph contradicts itself on whether that decision applies. The value of the order is that the Panel's vesting theory did not prevail; its reasoning is not a foundation for advice. This was decided by the ITAT (Shri N.V. Vasudevan, Vice-President and Shri Chandra Poojari, Accountant Member (Income Tax Appellate Tribunal, Bangalore Benches 'B')) and bears on section 17(2)(vi), section 17(2)(iiia), section 40(a)(ia), section 192, section 37(1), section 15 of the Income Tax Act 1961. It is reported as IT(TP)A No. 692/Bang/2017 and IT(TP)A No. 2861/Bang/2017, assessment years 2012-13 and 2013-14 (ITAT Bangalore). The Panel's argument is a real one and it is being made. It runs: the Special Bench in Biocon holds the discount is allowable to the employer over the vesting period; the same transaction cannot be an ascertained expense in the company's hands and no income in the employee's; therefore the perquisite is taxable to the employee at vesting, and if the employer did not deduct then the expenditure must be disallowed under s.40(a)(ia). The employer's ground in answer was that under s.17 perquisite taxation arises only at the time of EXERCISE of the option. The Tribunal allowed that ground. But it did so on the footing that CIT v. Infosys Technologies Ltd. applied, and that decision turned on the absence, before 1 April 2000, of any mechanism for valuing the option — a gap that Explanation (c) to s.17(2)(vi) and Rule 3(8) have since filled. Paragraph 16.1 first says the Supreme Court ratio "cannot be applied for the assessment year 2011-2012" and then, three sentences later, that it "is squarely applicable to the facts of the case"; and the sentence in which the Tribunal states its conclusion says the shares "could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised", which cannot be right for a year in which s.17(2)(vi) and Rule 3(8) were both in force. Use the order for what it decided — the disallowance went — and not for what its language appears to say about whether an ESOP is a perquisite at all. If it applies to you, the first step is this: If a Panel or Assessing Officer runs the vesting argument, put the statutory words first: Explanation (c) to s.17(2)(vi) values the security "on the date on which the option is exercised by the assessee", and Rule 3(8) and Rule 3(9) both key to the same date.
The assessee's ultimate holding company, NXP Semiconductors N.V., had introduced stock-based compensation plans in 2007 under which certain employees of the Indian company were granted options and restricted stock units. Following the ICAI's Guidance Note on accounting for employee share based payments, the Indian company measured the stock compensation cost using the fair value method and amortised it over the vesting period, recognising a provision of Rs 65,23,426 for the year ended 31 March 2012 and claiming it as an allowable expenditure. It also stated that the provision had been reversed in financial year 2014-15 and offered to tax. The Assessing Officer disallowed the expense on the ground that tax had not been deducted at source on the perquisite taxable in the employees' hands. The assessee's ground was that under s.17 perquisite taxation arises only at the time of exercise of the option. The Dispute Resolution Panel took the view that since the Special Bench decision in Biocon holds the expenditure allowable at vesting, by corollary the income becomes taxable in the employees' hands at vesting, so that if the employer had not treated the perquisite amount at vesting as salary and deducted tax on it, the expenditure was to be disallowed under s.40(a)(ia). The matter was decided on 2020-04-27 by the ITAT (Shri N.V. Vasudevan, Vice-President and Shri Chandra Poojari, Accountant Member (Income Tax Appellate Tribunal, Bangalore Benches 'B')). On those facts the ITAT held as follows. Ground No. 12 was allowed and the appeal in IT(TP)A No. 692/Bang/2017 was partly allowed for statistical purposes (paras 16.1 and 17). The Tribunal held that "the element of shares to employees under ESOP could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised" (para 16.1). The practical effect was that the disallowance of the stock compensation expense, which the Dispute Resolution Panel had rested on the proposition that the employee is charged at vesting, was not sustained.
The Tribunal took the view that a similar issue had come before the Supreme Court in CIT v. Infosys Technologies Ltd. [(2008) 297 ITR 167 (SC)] and reproduced that judgment at length, including its holdings that clause (iiia) inserted in s.17(2) by the Finance Act 1999 with effect from 1 April 2000 was not clarificatory or retrospective, that until 1 April 2000 the value of the option was not ascertainable in the absence of a definition of "cost", that a potential benefit could not be treated as income where the shares were subject to a lock-in period, and that estimation of tax deductible under s.192 in the absence of clear provisions on valuation of the perquisite would not justify treating the employer as an assessee in default (para 16). It then recorded that the Supreme Court had not expressed any opinion on the law prevailing after 1 April 2000, stated in one sentence that the ratio could not be applied for assessment year 2011-2012, noted that s.17(2)(iiia) was amended with effect from 1 April 2000 but deleted by the Finance Act 2000 with effect from 1 April 2001, and then stated that the Supreme Court's judgment was squarely applicable, on which footing it allowed the ground (para 16.1). In the words reproduced by the source cited on this page: "Accordingly, we hold that the element of shares to employees under ESOP could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised." The decision followed or applied CIT v. Infosys Technologies Ltd. [(2008) 297 ITR 167 (SC)] — reproduced and applied by this Tribunal, on reasoning that is internally inconsistent.
It was decided by the ITAT on 2020-04-27 and is reported as IT(TP)A No. 692/Bang/2017 and IT(TP)A No. 2861/Bang/2017, assessment years 2012-13 and 2013-14 (ITAT Bangalore). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 17(2)(vi), section 17(2)(iiia), section 40(a)(ia), section 192, section 37(1), section 15, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Ground No. 12 was allowed and the appeal in IT(TP)A No. 692/Bang/2017 was partly allowed for statistical purposes (paras 16.1 and 17). The Tribunal held that "the element of shares to employees under ESOP could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised" (para 16.1). The practical effect was that the disallowance of the stock compensation expense, which the Dispute Resolution Panel had rested on the proposition that the employee is charged at vesting, was not sustained. It arises in Deductions & Disallowances, Salary & Perquisites, TDS Defaults and Assessment & Scrutiny matters, on section 17(2)(vi), section 17(2)(iiia), section 40(a)(ia), section 192, section 37(1), section 15 of the Income Tax Act 1961, and was decided by Shri N.V. Vasudevan, Vice-President and Shri Chandra Poojari, Accountant Member (Income Tax Appellate Tribunal, Bangalore Benches 'B'). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Separate the two questions in your reply. When the employer may deduct its cost, and when the employee is charged, are governed by different provisions; the Panel's argument assumes they must coincide and that assumption should be challenged directly. Cite this order, if at all, for its outcome only, and disclose its reasoning frankly. An opponent who reads paragraph 16.1 will find the contradiction, and it is better to have dealt with it first. Do not cite CIT v. Infosys Technologies Ltd. for the proposition that an ESOP is not a perquisite. It construed the pre-2000 law and expressly turned on the absence of a valuation mechanism. Where the real complaint is that tax was not deducted, meet it under ss.201 and 201(1A) rather than conceding a disallowance, which is the route the Chennai Tribunal took in Caterpillar India as reproduced in ELCA Cosmetics.
Validity check could not be completed. Validity check could not be completed, and this entry should be treated as a warning as much as an authority. No appeal against the order was searched for and no later judicial treatment of it was located. The proposition stated in the concluding sentence of paragraph 16.1 is inconsistent with s.17(2)(vi) and Rule 3(8), both of which were in force for the years before the Tribunal, and the paragraph contradicts itself on whether CIT v. Infosys Technologies Ltd. applies at all. The Supreme Court decision it relies on is already in this library under its own entry and construed the law before 1 April 2000. What can safely be taken from this order is that the Dispute Resolution Panel's argument — that because the employer's deduction runs to vesting the employee's charge must too — did not carry the day here. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
READ THIS BEFORE USING THE ORDER. The document runs to thirty-eight numbered paragraphs, of which paragraphs 1 to 11 and 18 to 37 concern transfer pricing comparables and are irrelevant here; the corporate tax ground on stock compensation is Ground No. 12, dealt with at paragraphs 12 to 17. Paragraph 14 is a summary of the DISPUTE RESOLUTION PANEL'S view, not the Tribunal's, and its four-stage description of an ESOP (granting, vesting, exercise, sale) and its conclusion that income becomes taxable at vesting belong to the Panel. Paragraph 16 is a long quotation from the Supreme Court in CIT v. Infosys Technologies Ltd. and every word of it belongs to that judgment. The Tribunal's own words are the last part of paragraph 16.1 and paragraph 17. Paragraph 16.1 is internally inconsistent: it says the Supreme Court's ratio "cannot be applied for the assessment year 2011-2012" and then that the judgment "is squarely applicable to the facts of the case". The assessment years before the Tribunal are 2012-13 and 2013-14, and paragraph 16.1 refers to assessment years 2011-2012 and 2012-2013 in the same breath; the stock compensation provision of Rs 65,23,426 is stated to be for the year ended 31 March 2012. The concluding words of paragraph 16.1 state a proposition that cannot stand for a year governed by s.17(2)(vi) and Rule 3(8), and I record it as the order's own language rather than as law. Note also that this order engages the vesting question only through the Panel's argument; it makes no finding about restricted stock units, although paragraph 13 records that the ultimate holding company's plans granted both options and restricted stock units. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Ground No. 12 was allowed and the appeal in IT(TP)A No. 692/Bang/2017 was partly allowed for statistical purposes (paras 16.1 and 17). The Tribunal held that "the element of shares to employees under ESOP could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised" (para 16.1). The practical effect was that the disallowance of the stock compensation expense, which the Dispute Resolution Panel had rested on the proposition that the employee is charged at vesting, was not sustained.
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