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Income Tax Appellate Tribunal, “SMC - B” BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO
Per Vijay Pal Rao, Judicial Member
This appeal by the assessee is directed against the order dated 30.11.2016 of CIT(A) for the assessment year 2012-13. The assessee has raised the following grounds:
Page 3 of 9 2. Ground nos. 1 to 6 is regarding the addition made by the AO on account of perquisites of Employees Stock Option (ESO). The assessee was employed with Intel Technology India Pvt. Ltd during the financial year 2011-12 for a period from 01.04.2011 to 31.05.2011. Thereafter the assessee left for USA to work with Intel Corporation. The assessee filed return of income declaring total income of Rs. 13,69,689/-. The AO found that the assessee has earned stock option value of Rs. 32,99,286/- during the year. The AO was of the view that this value was vested to the assessee by the Indian employer during the year. The AO further found that in the Form 16 furnished by the employer the stock option value has been shown at Rs. 6,71,829/- thus the AO has added the differential amount of Rs. 26,27,457/- as perquisites and salary income of assessee. The assessee challenged the action of the AO before the CIT(A) and contented that the stock option was granted on various dates with the condition that the assessee can exercise the option rights only on completion of one year’s employment from the date of grant of stock option. Since it is considered as perquisite by the AO and being part of the salary therefore, the options was exercised by the assessee when he was the employee of USA company Intel Corporation and this right was not vested during his stay in India but it was vested and exercised during his employment in USA. The assessee contented that in any case only
Page 4 of 9 the proportionate amount of stock option value in the ratio of the tenure of employment with Indian company and with USA company during the year under consideration. Thus the assessee has contented that so far as the perquisites which relates to the employment with the USA company the same is taxable only in USA as per the provisions of Article 16(1) of Indo-USA DTAA. The CIT(A) though in principle accepted the contention of the assessee that as per the provisions of DTAA the more beneficial provisions are applicable to the assessee however, without giving a concluding finding the appeal of the assessee was dismissed.
Before the Tribunal the ld. AR of the assessee has reiterated his contention as raised before the CIT(A) and submitted that the right to exercise the stock option accrued to the assessee only when he was in employment with Intel Corporation, USA and therefore the stock option value cannot be assessed to tax in India as per the provisions of Article 16(1) of Indo-USA DTAA. He has further contented that the assessee was in India only upto 31.05.2011, which is two months during the financial year relevant to the assessment year under consideration and for remaining period the assessee was in the employment with Intel Corporation, USA. The stock option was granted during the period when the assessee was in India on various dates however the right to Page 5 of 9 exercise this option accrued to the assessee only after completion of one year employment. He has further contented that the stock option was not granted in one lot and at one time but it was granted on various dates in different lots and the purchase dates also varies for different lots of shares. Similarly, the right to exercise the option was also accrued on different dates on completion of one year from the date of grant of option. Therefore the ld. AR has pleaded that even if some part of the value of stock option is assessable to tax in India the same has to be computed in the ratio of duration of employment in India and employment in USA during the year under consideration. He has furnished the details of working for computation of the proportionate value of stock options to be taxed in India and USA. The ld. AR has further contented that the assessee has already offered this income in USA and therefore it has suffered tax in USA.
On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that when the stock option was granted in India then the benefits received by the assessee is accrued from the date when the stock option was granted.
Page 6 of 9 5. Having considered the rival submissions as well as relevant material on record it is noted that the assessee remained in employment with Intel Technology India Pvt. Ltd , India only for two months upto 31.05.2011 during the financial year relevant to the assessment year under consideration. It is claimed by the assessee that the employee stock option in question were granted during his employment in India. However the right to exercise the stock option accrued to the assessee only after the completion of one year employment from the date of grant of stock option. Thus it was contented that the value of stock option is not an income taxable in India as it accrued to the assessee during his employment with USA company and therefore as per the provisions of Article 16(1) of Indo-USA DTAA the said income is assessable to tax in USA. It is pertinent to note that the AO has considered the value of stock option as perquisites and therefore it will be part of salary income of assessee as per the provisions of IT Act. In the absence of any definition provided under Article 16(1) or other provisions of Indo-USA DTAA the perquisites has to be considered as part of salary for the purpose of the provisions of Indo-USA DTAA Article 16(1) of Indo- USA DTAA reads as under:
“Article 16(1) Salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other Contracting State Article 16 of the Indo-US DTAA deals with ‘Dependent Personal Services’. Article 16(1) of the Indo-US DTAA states that the salary would be taxable only in the country of residence unless employment is exercised in the other country.”
It is clear that the salary derived by a resident of India in respect of employment exercised in the other contracting state is taxable only in that contracting state. Therefore the salary income of the assessee from the employment in USA is taxable in USA as per the provisions of Article 16(1) of Indo-USA DTAA. It is also pertinent to note that the grant of Employees Stock Option itself does not give right to exercise the stock option until and unless the conditions attached to the grant of employee stock option are complied with. In this case it is contented that the stock options were granted with the condition that the assessee should continue in employment for atleast one year from the date of grant of option and only after completion of service of atleast one year the assessee could exercise the stock options. Therefore if the grant of stock option was subjected to such conditions then the right to exercise the option arises only on completion of the conditions attached to the Page 8 of 9 grant of stock option. The AO has not examined all these aspects of the matter. Even the CIT(A) has also not examined all the relevant aspects though the provisions of Article 16(1) of Indo-USA DTAA were considered by the CIT(A) as applicable in the case of the assessee. Therefore in the facts and circumstances of the case, this issue is set aside to the record of the AO for deciding the same afresh after considering the relevant details and facts as filed by the assessee. Needless to say the assessee be given an opportunity of hearing.
Ground nos. 7 to 9 regarding non-grant of foreign tax credit in respect of short term capital gain. I have heard the ld. AR as well as the ld. DR and considered the relevant material on record. The ld. AR has submitted that the capital gain arose on sale of the shares was offered to tax in USA as well as in India however, the AO has not granted the credit for the taxes paid in USA on the capital gain. The ld. DR has submitted that this issue is required to be verified.
Accordingly, in the facts and circumstances of the case and by considering the rival submissions of the parties, the AO is directed to verify and consider the foreign tax credit as claimed by the assessee.
In the result the appeal of the assessee is allowed for statistical purposes.
Pronounced in the open court on this 31st day of March, 2017