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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
These appeals filed by two different assessees are directed against the respective orders of the Commissioner of Income Tax (Appeals)-5, Chennai, dated 20.01.2016, 11.01.2016 and 20.11.2015 respectively. When the former has filed appeal for the assessment year 2011-12, the latter has filed appeals for assessment years 2011-12 and 2012-13. Since common issue arises for consideration in all these appeals, we heard these appeals together and disposing of the same by this common order.
Shri N.V. Balaji, the Ld.counsel for the assessees, submitted that the assessees are employees of M/s Cognizant Technologies India Pvt. Ltd. During the years under consideration, M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA, the parent company of the assessees, promoted an incentive plan for the employees of M/s Cognizant Technologies India Pvt. Ltd. known as “1999 Incentive Compensation Plan”. As per this Plan promoted by the parent company, namely, M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA, option was given to the employees of M/s Cognizant Technologies India Pvt. Ltd. for providing Stock Appreciation Rights. The assessees, being employees of M/s Cognizant Technologies India Pvt. Ltd., were eligible for participation in “1999 Incentive Compensation Plan” announced by the parent company. According to the Ld. counsel, Stock Appreciation Right is nothing but a right for appreciation of the value of shares given / allotted to the assessees by the parent company. As per the Stock Appreciation Rights, the assessees were not offered any security or sweat equity shares.
What was given to the assessees is a right for appreciating the value of certain specified number of securities. During the year under consideration, M/s Cognizant Technologies India Pvt. Ltd. deducted tax by treating the Stock Appreciation Rights as a perquisite in the hands of the assessees. Stock Appreciation Rights was also subjected to tax in USA since the parent company, namely, M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA has also deducted tax. According to the Ld. counsel, the Stock Appreciation Rights availed by the assessees suffered tax twice, once in USA and again in India.
Shri N.V. Balaji, the Ld.counsel for the assessees, submitted that Stock Appreciation Rights offered to the assessees is a capital asset, therefore, the realization of value of the Stock Appreciation Rights is nothing but capital gain. The Ld.counsel further submitted that since no security was offered or allotted to the assessees, the Stock Appreciation Rights cannot be construed as perquisite in the hands of the assessees. According to the Ld. counsel, Stock Appreciation Rights was granted to the assessees under “1999 Incentive Compensation Plan” during the years 2000 and 2002.
According to the Ld. counsel, Stock Appreciation Rights was given to the assessees for the service rendered to M/s Cognizant Technologies India Pvt. Ltd. in India during the vesting period.
When the right was vested on the assessees, the assessees were non-resident Indians rendering service outside India. Therefore, the value of Stock Appreciation Rights is not taxable in India even though when the right was exercised, the assessees were residents of India. The Ld.counsel further submitted that the Stock Appreciation Rights was given by USA company and the assessee were not employees of USA company, therefore, it cannot be construed as perquisite in the hands of the assessees. According to the Ld. counsel, there was no employer and employee relationship between M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA and the assessees.
Therefore, whatever amount received by the assessees from M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA by way of Stock Appreciation Rights is not taxable in India either as salary or as perquisite. The Ld.counsel further submitted that the amount realized on Stock Appreciation Rights was subjected to tax in USA, therefore, taxing the same amount in India would amount to double taxation.
On the contrary, Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that the assessees are employees of M/s Cognizant Technologies India Pvt. Ltd. The assessees were offered employee stock option during the year under consideration and the assessees realized the value of the specific security allotted to them. According to the Ld. D.R., the difference between the market value of shares on the date of exercising of option and the grant price of the shares was taxable as perquisite in the hands of the recipient employees. According to the Ld. D.R., what was paid to the assessees was in lieu of salary, therefore, it is a perquisite in the hands of the assessees. Referring to Section 17(2) of the Income-tax Act, 1961 (in short 'the Act'), the Ld. D.R. submitted that the value of any specified security or sweat equity shares allotted or transferred directly or indirectly by the employer at free of cost or at concessional rate to its employees should be taxed as perquisite in the hands of the employees. In this case, the assessees claim that the option was given by the parent company to the employees of Indian subsidiary company.
Referring to Section 17(2)(vi) of the Act, the Ld. D.R. submitted that when the value of specified security or sweat equity shares was transferred directly or indirectly by the employer either free of cost or at concessional rate, the same has to be treated as perquisite in the hands of the recipient employees. In this case, the assessees were employees of Indian company, which is subsidiary of M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA. The assessees, being employees of the subsidiary company to the parent company, namely, M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA, were allotted Stock Appreciation Rights. Therefore, according to the Ld. D.R., the benefit was conferred on the assessees being employees of Indian company which is subsidiary to the USA company. Therefore, according to the Ld. D.R., a benefit was conferred on the assessees indirectly, therefore, it is a perquisite in the hands of the assessees. Hence, both the authorities below have rightly found that the value of Stock Appreciation Rights is liable for taxation in India.
Referring to the claim of the assessee that the same amount was taxed in USA, the Ld. Departmental Representative submitted that the assessee has not filed any certificate from tax authorities of USA for payment of tax in respect of Stock Appreciation Rights which was subject matter of taxation in these appeals. Therefore, according to the Ld. D.R., the CIT(Appeals) has rightly confirmed the addition made by the Assessing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessees are employees of M/s Cognizant Technologies India Pvt. Ltd., which is a subsidiary company of M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA. It is not in dispute that the assessees were given Stock Appreciation Rights.
As per the scheme promoted by M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA, Stock Appreciation Rights is nothing but payment in cash to the excess of fair market value of common stock or other specified valuation of specified number of shares of common stock on the date the Stock Appreciation Rights was exercised over the fair market value of the common stock or other specified valuation. The eligibility condition for participation in the scheme is that the recipients should be employees of the company or non-employee directors and independent contractors. The assessees now claim that they are employees of M/s Cognizant Technologies India Pvt. Ltd. and not of M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA. Therefore, the value of the Stock Appreciation Rights cannot be treated as perquisite in the hands of the assessees. This Tribunal is of the considered opinion that if the assessees were not employees of the M/s Cognizant Technologies India Pvt. Ltd., a subsidiary company of M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA, they would not have been given option of availing Stock Appreciation Rights under the scheme. It is the case of the assessees that the Stock Appreciation Rights was given to all the persons who are not connected with M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA. The option was given to the employees who are in association or connected with USA company, either directly or indirectly, so as to motivate the employees to perform their best in their work. Therefore, directly the M/s Cognizant Technologies India Pvt. Ltd. would be benefited and indirectly M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA is also benefited. Therefore, the contention of the assessees the incentive was not provided by the employer of the assessees is not correct. The parent company, who is interested in the business of the M/s Cognizant Technologies India Pvt. Ltd., in order to promote their business and for commercial expediency, the scheme was promoted and offered to the assessees an option. The assessees being employees of M/s Cognizant Technologies India Pvt. Ltd., accepted the offer and benefited and enriched themselves. This payment is in addition to salary for the service rendered to M/s Cognizant Technologies India Pvt. Ltd. Therefore, this Tribunal is of the considered opinion that what was received by the assessee is a perquisite in the hands of the assessee-company or benefit in lieu of salary for the services rendered. Hence, the same has to be construed as income in the hands of the assessees.
As for the contention of the Ld.counsel for the assessees that what was given to the assessees in the form of Stock Appreciation Rights is a capital asset in the hands of the assessees, therefore, the same cannot be treated as income of the assessees, this Tribunal do not find any merit in this contention of the Ld.counsel. The incentive was given to the assessees as a compensation for the services rendered to M/s Cognizant Technologies India Pvt. Ltd. It was not given for transfer of capital asset or termination of any source of income. Therefore, the right conferred on the assessees, namely, Stock Appreciation Rights under the scheme cannot be construed as capital asset. What was conferred on the assessees is only valuation of appreciation for a specified number of stocks. The stock itself was not conferred on the assessees. The stock was retained in the common kit and the appreciation value was given to the assessees. This was given because the assessees were employees of subsidiary company of M/s Cognizant Technology Solutions Corporation, a Delaware Corporation, USA. Since the right to receive the appreciation value alone was conferred on the assessees and not right on the stock itself, this Tribunal is of the considered opinion that what was received by the assessees is not capital asset. Hence, the same is liable for taxation as revenue receipt.
Coming to the next contention of the assessees that during the vesting period, the assessees were non-residents and rendered service outside India, therefore, not taxable in India, this Tribunal is of the considered opinion that the benefit was conferred on the assessees in the form of Stock Appreciation Rights for the services rendered to the subsidiary company, M/s Cognizant Technologies India Pvt. Ltd. Therefore, merely because the assessees were non- residents and rendered service outside India during the vesting period that cannot be a reason for claiming that the same was not taxable in India. Admittedly, when the assessees exercised option for Stock Appreciation Rights, they were residents in India.
Therefore, when the Stock Appreciation Rights was vested irrespective of the residency, the same is liable for taxation in India.
The assessees also contended before this Tribunal that the value of Stock Appreciation Rights on realization suffered tax in USA, therefore, it cannot be taxed again in India. As rightly submitted by the Ld. D.R., there is no material available on record to suggest that the value of Stock Appreciation Rights was suffered tax in USA. The assessees have not produced the certificate before the authorities below or before this Tribunal from USA tax authorities to support the claim that the same was subjected to tax in USA. Since the assessees claim that the value of Stock Appreciation Rights was subjected to taxation in USA, this Tribunal is of the considered opinion that the same has to be examined in the light of the Double Taxation Avoidance Agreement between Government of India and Government of USA on the basis of the certificate issued by the tax authorities in USA. Therefore, while confirming that the value of Stock Appreciation Rights received by the assessees is liable for taxation, the matter is remitted back to the file of the Assessing Officer for limited purpose of examining whether the assessee has paid tax in USA on the value of the very same Stock Appreciation Rights in the light of the Double Taxation Avoidance Agreement between Government of India and Government of USA.
In the result, appeals of the assessees are partly allowed for statistical purposes.
Order pronounced on 5th May, 2016 at Chennai.