Rule 3(8)

Rule 3(8) — the law in short

What the courts have decided on section Rule 3(8), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• ACIT v Bidhan Chandra Choudhary — the merchant banker's Rule 3(8)(iii) value fixes the sweat equity perquisite, and a foreign investor's DCF price paid a month later cannot be substituted ITATHelps taxpayerNo later treatment found
  My employer valued my unlisted sweat equity shares through a merchant banker, but the Assessing Officer says the company sold shares to a foreign investor a month later at a far higher price and has taxed me on the difference. Can he do that?
  No, on these facts — and this is stage one, the perquisite that arises on exercise under s.17(2)(vi). The Tribunal held that where the shares are unlisted the fair market value is the value determined by the merchant banker under Rule 3(8)(iii), and that a price fixed under the Reserve Bank of India's foreign direct investment pricing guidelines on a discounted free cash flow basis for an issue to a non-resident investor cannot be substituted for it, because the two sets of provisions deal with altogether different situations. The Revenue's appeal against deletion of a perquisite addition of Rs 4,53,18,900 was dismissed.
• ACIT (TDS) v Sula Vineyards Pvt Ltd — for unlisted shares the Rule 3(8) merchant banker value governs the ESOP perquisite, and a genuine sale at a much higher price to an unrelated party does not displace it ITATHelps taxpayerNo later treatment found
  The TDS officer says my employer under-deducted on my ESOP perquisite because the company's shares actually changed hands at Rs 850 while the merchant banker valued them at Rs 194. Which figure fixes the perquisite?
  The merchant banker's figure — and this is stage one, the perquisite on exercise under s.17(2)(vi). The Tribunal held that on a plain reading of Rule 3(8) the fair market value of an unlisted company's shares is the value determined by a merchant banker, so an actual arm's length sale of the same company's shares at Rs 850 during the same year gave the Revenue no basis for recomputing the perquisite. The Revenue's appeal against deletion of a short-deduction demand of Rs 2,62,34,000 was dismissed.
• Statutory position — s.17(2)(vi): stage one of the employee share charge, the perquisite on exercise, and what a "specified security" and a "sweat equity share" are CBDT Circulars & InstructionsCuts both ways
  My employer put a large ESOP figure in my Form 16 in the year I exercised my options, even though I have not sold a single share. On what provision is that being taxed, and how is the amount worked out?
  This is stage one of a two-stage charge. On the day you EXERCISE the option, s.17(2)(vi) makes the difference between the fair market value of the share on that date and the amount you actually paid a perquisite, taxable as salary — whether or not you sell anything, and whether or not you receive any cash. Stage two comes later, on sale, when the difference between the sale price and that same fair market value is a capital gain, with the cost of acquisition fixed by s.49(2AA) at the value already taxed here. The fair market value on the date of exercise is the hinge between the two stages, and it is fixed by Rule 3(8) and Rule 3(9).
• Statutory position — restricted stock units: what s.17(2)(vi), Rule 3(8) and s.2(42A) actually say about them, and the express statement that no authority fixing the charging point at vesting was found CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client is paid partly in restricted stock units of a US parent. Everyone tells me RSUs are taxed on vesting rather than on exercise. Is there authority for that in Indian law?
  None has been found, and this entry — which is about stage one, the perquisite charge — says so expressly rather than reasoning by analogy from options. What the Act does say is this. Stage one, s.17(2)(vi), charges "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee" — words wide enough on their face to catch shares of a foreign parent delivered to an Indian employee without payment. But the VALUATION machinery is written around an option: Explanation (c) values the security "on the date on which the option is exercised by the assessee", Explanation (e) defines "option" as "a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price", and Rule 3(8)(i) and Rule 3(9) both fix the fair market value "on the date on which the option is exercised by the employee". Stage two is clearer: s.49(2AA) makes the cost the value taken into account at stage one, and s.2(42A) Explanation 1(i)(hb) runs the holding period from the date of allotment or transfer.
• Statutory position — Rule 3(8) and Rule 3(9): how the fair market value of an ESOP or sweat equity share is fixed on the date of exercise, including the merchant banker's specified date CBDT Circulars & InstructionsCuts both waysNo later treatment found
  The Assessing Officer says my ESOP perquisite should have been computed on a higher share value than my employer used. What is the prescribed method for fixing the fair market value on the date I exercised?
  This is stage one — the fair market value that fixes the perquisite under s.17(2)(vi) on exercise. For an equity share LISTED on a recognised stock exchange, Rule 3(8)(ii) takes the AVERAGE OF THE OPENING PRICE AND THE CLOSING PRICE of the share on the date of exercise on that exchange; where it is listed on more than one exchange, the exchange with the highest volume of trading in the share; and where there is no trading in the share at all on the date of exercise, the closing price on the recognised stock exchange on the date closest to and immediately preceding the exercise date. For an equity share NOT listed, Rule 3(8)(iii) takes such value as is determined by a merchant banker on the "specified date", and Rule 3(9) applies the same merchant-banker method to a specified security that is not an equity share. The "specified date" is the date of exercise, or any earlier date NOT MORE THAN 180 DAYS BEFORE THE DATE OF EXERCISE — this is the point most often got wrong.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.