2016 (5) TMI 819 - AT - Income Tax

Tax Tribunal Rules Stock Appreciation Rights as Taxable Perquisite, Not Capital Asset

The Tribunal partially allowed the appeals, determining that Stock Appreciation Rights granted by a US parent company to employees in India constituted a ... TDS on Stock Appreciation Rights as a perquisite in the hands of the assessees - India - USA DTAA - whether the Stock Appreciation Rights availed by the assessees suffered tax twice, once in USA and again in India? - Held that:- 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. 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. 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 nonresidents 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. - Decided partly in favour of assessee for statistical purposes. Issues:1. Tax treatment of Stock Appreciation Rights granted to employees by a parent company.2. Classification of Stock Appreciation Rights as perquisite or capital asset.3. Tax liability in India and USA regarding Stock Appreciation Rights.Analysis:1. The case involved appeals by two assessees against orders of the Commissioner of Income Tax regarding Stock Appreciation Rights granted by the parent company, Cognizant Technology Solutions Corporation, USA, to employees of its subsidiary in India, Cognizant Technologies India Pvt. Ltd. The assessees claimed that the Stock Appreciation Rights were taxed twice, in the USA and India, leading to double taxation concerns.2. The assessees argued that the Stock Appreciation Rights should be treated as capital gains since they were not offered any security or sweat equity shares. They contended that the rights were granted for services rendered during the vesting period when they were non-resident Indians, and therefore, not taxable in India. However, the Departmental Representative asserted that the rights were a perquisite in lieu of salary, taxable under Section 17(2) of the Income-tax Act, 1961.3. The Tribunal analyzed the nature of the Stock Appreciation Rights and the employment relationship between the assessees and the parent company. It concluded that the rights were given as an incentive for the employees' performance, thus constituting a perquisite or benefit in lieu of salary. The Tribunal rejected the argument that the rights were a capital asset, stating they were a revenue receipt. The Tribunal also noted that the assessees' residency status during the vesting period did not affect the taxability of the rights in India. Additionally, the Tribunal directed the Assessing Officer to verify if the rights were taxed in the USA under the Double Taxation Avoidance Agreement.In conclusion, the Tribunal partially allowed the appeals for statistical purposes, emphasizing the tax liability of the Stock Appreciation Rights in India and the need for verification of taxation in the USA under the bilateral agreement.