Key Highlights
Facts of the case
The taxpayer was a non-resident individual as per the provisions of the 1961 Act3 and a tax resident of the United Kingdom. He was employed with the UK branch of an Indian company (ICo). Under a stock option scheme of ICo, the taxpayer was granted stock options in ICo, at an exercise price of INR1 per share. During financial year (FY) 2018-19, the taxpayer exercised 1,540 vested options and received corresponding shares.
The FMV of the shares on the exercise date was approximately INR 1,754 per share. The taxpayer subsequently sold the shares and computed a short-term capital loss by adopting the FMV on the exercise date as the cost of acquisition.
The Revenue contended that since the stock perquisite was not taxable in India owing to his non-resident status, the taxpayer was not entitled to adopt FMV as the cost of acquisition and that only the actual exercise price should be considered as cost. Accordingly, the Revenue assessed short-term capital gains.
Relevant provisions to the case
Section 17(2)(vi) of the 1961 Act defines “perquisite” to include the value of any specified security or sweat equity shares allotted or transferred by the employer (or former employer) to the employee, either free of cost or at a concessional rate.
Explanation (c) to section 17(2)(vi) provides that the perquisite value is the FMV of the security/ share on the date of exercise as reduced by the amount actually paid by, or recovered from, the employee.
Section 49(2AA) provides that if capital gain arises from the transfer of shares received under a stock option scheme, the cost of acquisition of such shares will be the FMV that has been taken into account for the purposes of perquisite valuation.
Revenue’s contentions
The taxpayer could not rely on provisions of section 49(2AA) to determine the cost, as the stock perquisite related to services was rendered outside India and was not taxable in India.
The cost of acquisition should be restricted to the actual amount paid by the taxpayer, i.e., the exercise price of INR 1 per share.
Capital gains arising from sale of shares of an Indian company were taxable in India and should be computed using such exercise price as cost.
The Tribunal’s decision
The Tribunal ruled in favor of the taxpayer and directed the Revenue to recompute the capital gains by adopting FMV on the exercise date as the cost of acquisition. Key observations of the Tribunal included:
Section 49(2AA) does not require actual taxation of perquisite in India
The relevant provision refers to FMV that has been "taken into account" for determining the value of the stock benefit. It does not require that such perquisite should have been actually taxed in India.
The expression “taken into account" has wider import
The expression refers to FMV determined in accordance with the prescribed valuation mechanism and is independent of whether the resulting perquisite ultimately forms part of taxable income in India.
No additional condition can be read into the statute
Section 49(2AA) does not require the ESOP perquisite to have been taxed in India and reading such a condition into the provision would amount to adding words not contemplated by the Indian Parliament. Additionally, it rejected the distinction drawn by the Dispute Resolution Panel between perquisites taxed in India and those taxed overseas, observing that the statute makes no such distinction.
Computation of perquisite and its chargeability to tax operate independently
The computation of perquisite and its chargeability to tax operate in different fields. Therefore, the availability of FMV as cost is not dependent on whether the perquisite was taxable in India.
Judicial precedents distinguished
The Tribunal distinguished the decision of the Hyderabad Bench of the Tribunal4 holding that the said decision was on peculiar facts of that case and cannot be read as laying down an absolute proposition that the benefits of section 49(2AA) of the 1961 Act are available only where the perquisite has actually suffered tax in India. The judicial precedents5 relied upon by the Revenue mainly dealt with the residential status and taxability of salary/perquisites and did not specifically examine the scope and interpretation of section 49(2AA) while determining the cost of acquisition of shares acquired under an ESOP for the purposes of computing capital gains.
