TaxTMI 
TaxTMI 
2024 (8) TMI 516
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....rketplace Private Limited (FMPL). FMPL is a company incorporated under the laws of Singapore and is a wholly owned subsidiary of Flipkart Private Limited Singapore (FPS). 3. FPS implemented the Flipkart Stock Option Scheme, 2012 (the FSOP 2012). Under the FSOP 2012, employees' stock options (ESOPs) were granted to option grantees, who are either employees or any other persons approved by the Board and to whom stock options were granted. The expression 'employee' was defined in the FSOP 2012 as meaning a permanent employee of a Group Company working in Singapore or outside Singapore; or a director or officer of the Group Company, whether a full time director or officer or not. The expression 'subsidiaries' was also defined in FSOP 2012 as meaning all companies owned and controlled by FPS, including the four entities expressly enumerated in the definition. 4. On 21.04.2023, FPS announced compensation of US Dollar (USD)43.67 per ESOP in view of the divestment of its stake in the PhonePe business, and described such payment as being made although there is no legal or contractual right thereto under the FSOP 2012. Such compensation was payable to all option gra....
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....ointing out that the petitioner was granted 5924 ESOPs and continues to hold the same number of ESOPs today, he contended that there was no transfer of capital assets. In the absence of transfer of capital assets, he further contended that capital gains tax cannot be levied. Put differently, his contention was that the compensation paid to the petitioner was a capital receipt and that capital receipts are taxable as capital gains provided such gains accrued from the transfer of capital assets. Since capital assets were not transferred by the petitioner, he reiterated that capital gains tax cannot be imposed. 8. By adverting to the impugned order, learned senior counsel submitted that it was erroneously held therein that the asset transferred by the petitioner was the relinquishment of the right to sue or litigate. As an ESOP holder, learned senior counsel contended that the petitioner had no right to receive compensation for the divestment of the PhonePe business by FPS. In the absence of a right to receive compensation, he further contended that the payment was a discretionary one time payment by FPS. Even if such compensation had not been paid, he contended that the terms of t....
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.... v. CIT, (2013) 351 ITR 110 (Delhi) (x) CIT v. BK Roy, (2001) 248 ITR 245 (Calcutta) (xi) CIT v. M Ramalakshmi Reddy, (1981) 131 ITR 415 (Mad.) (xii) CIT v. David Lopes Menezes, (2011) 336 ITR 337 (xiii) Siemens Public Communication Network (P.) Ltd. v. CIT, Bangalore (2017) 390 ITR 1 (SC) (xiv) Vodafone India Services (P.) Ltd. v. UOI, (2014) 368 ITR 1(Bombay) (xv) CIT v. Deutsche Post Bank Home Finance Ltd., (2014) 265 CTR 525 (Delhi) (xvi) CIT v. Handicrafts and Handlooms Export Corporation of India Ltd. 11. In support of the proposition that capital receipts, which are not chargeable under Section 45 of the I-T Act, cannot be taxed under any other heads, he relied upon the following judgments: (i) CIT v. D.P.Sandhu Brothers Chembur (P) Ltd., [2005] 142 Taxmann 713 (SC) ; (ii) Cadell Weaving Mill Co. (P) Ltd. v. CIT, [2001] 116 Taxman 77 (Bombay) . (iii) CIT v. Vazir Sultan & Sons, (1959) 36 ITR 175 (iv) United Commercial Bank Ltd v. CIT, AIR 1957 SC 918 12. He placed reliance on CIT v. B.C.Srinivas Setty, 128 ITR 294 (SC) , for the proposition that capital gains tax cannot b....
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....r of capital assets. ii) The I-T Act does not prescribe a computational mechanism for calculating capital gains tax in respect of the one-time discretionary compensation received by the petitioner. iii) In the absence of a specific tax rate, capital gains tax cannot be imposed on the transaction. iv) In contrast to the judgment in K.R.Srinath, the FSOP 2012 does not confer a contractual right on the petitioner to sue for specific performance. The judgment of the Hon'ble Supreme Court in Ahmed G H Ariff and others v. Commissioner of Wealth Tax, AIR 1971 SC 1691, is a wealth tax judgment and, therefore, inapplicable. (v) Since the compensation received by the petitioner was a capital receipt, which was not from the transfer of a capital asset, it cannot be treated as income under any provision of the I-T Act. Discussion, analysis and conclusions: The FSOP 2012 and the petitioner's ESOPs 16. Upon taking stock of the rival contentions, the first aspect that warrants consideration is the FSOP 2012, particularly the relevant clauses thereof. Clause 1.2 specifies that the objective of the FSOP 2012 is to advance the interest of the stak....
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....anent employee of a step-down subsidiary of FPS, the petitioner falls within the definition of Employee under the FSOP 2012. As on the record date (23.12.2022), he states that he held 2137 Vested Stock Options and 3787 Unvested Stock Options, thereby aggregating to 5924 Stock Options. With reference to the Vested Stock Options, he also states that he has not exercised the Option. The FSOP 2012 also provides that all the Group employees are eligible for being considered for the grant of Stock Options. On examining the FSOP 2012 in light of the affidavit, without doubt, the petitioner was granted Stock Options as an Employee. PhonePe divestment and compensation 18. As stated earlier, by communication dated 21.04.2023, FPS informed all stakeholders under the FSOP 2012 that it was paying compensation for the divestment of the PhonePe business to all the Option Grantees. For such purpose, it was stated that such compensation was determined by valuing each option at about USD 189.10 prior to the divestment and at about USD 165.83 upon divestment. The said communication, in relevant part, is as under: "As you are aware, the Board of Directors (BoD) of Flipkart Private Limit....
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....pital Gains is found to be an illogical contention.... 5. Therefore, the value of compensation to be received represents the surrender value of PhonePe holding, held by applicant while holding the Flipkart Options. Therefore, the claim that no asset was transferred is found to lack credence. 6.....This surrender or relinquishment of right to litigate is the asset transferred so as to earn this compensation and therefore the transaction squarely falls under the provisions of S.45" As is evident from the above extracts, the first respondent concluded that there was a capital gain arising out of transfer of a capital asset and that this is taxable under Section 45 of the I-T Act. 20. The above conclusions were assailed on the ground that there was no transfer of a capital asset. Specifically, it was contended that the petitioner held 5924 ESOPs before the compensation was paid and continued to hold the same number of ESOPs thereafter. It was also contended that the FSOP 2012 did not confer a right to compensation on the petitioner in case of divestment and, therefore, it cannot be said that there was a relinquishment of a right to sue. Before turning to the ten....
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.... 2013 (CA 2013) and, consequently, fall within the scope of the expression "any property" in Section 2(14) of the I-T Act. ESOPs, by contrast, are rights in relation to capital assets, i.e. rights to receive capital assets (shares) subject to the terms and conditions of the ESOP scheme. Since the petitioner has no rights in the Indian company of which he is an employee (other than as an employee), Explanation 1 is also not attracted. It is instructive to survey precedents cited by the petitioner and the respondents before drawing conclusions on whether ESOPs are capital assets and, more importantly, on the nature of receipts in relation thereto. 23. Several judgments were relied upon by the petitioner to substantiate the contention that the compensation received by him is a capital receipt that cannot be taxed because it did not accrue from the transfer of a capital asset, and some of the said judgments are discussed below. 24. In Kettlewell Bullen, the appellant therein was earlier appointed as the managing agent of Fort William Jute Company Limited. As per the contract, in the event of termination, the managing agent was to receive reasonable compensation for deprivation of....
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....eceipt. 26. In a similar vein, the Supreme Court concluded in Godrej & Co. that compensation for the variation of the terms of a managing agency was a capital receipt. In Senairam Doongarmall, the compensation received for requisitioning the factory buildings adjoining a tea garden and for the consequential cessation of tea production was held to be a capital receipt and, in Saurashtra Cement, the liquidated damages received for failure to supply an additional cement plant was construed as a capital receipt. The common thread running through all these cases was that compensation was paid either for the loss of the profit-making apparatus or, at a minimum, for the sterilization thereof. Consequently, such compensation was held to be a capital receipt. 27. At first blush, the ratio of the above cases seems to apply to the case at hand because compensation was paid for the diminution in value of ESOPs and potential losses on account of future accretion to ESOP holders due to the divestment of the PhonePe business. On closer examination, however, the following significant differences are noticeable. As stated earlier, ESOPs - and, in particular, the Stock Options in this case - a....
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....for diminution in value, it cannot be said that a non-existent right was relinquished. As discussed earlier, the ESOP holder has the right to receive shares upon exercise of the Option in terms of the FSOP 2012 and the right to claim compensation if such right were to be breached. But, here, the compensation was not paid for relinquishment of ESOPs or of the right to receive shares as per the FSOP 2012. In fact, the admitted position is that the petitioner retains all the ESOPs and the right to receive the same number of shares of FPS subject to Vesting and Exercise. Upon considering all the above aspects holistically, I conclude that ESOPs do not fall within the ambit of the expression "property of any kind held by an assessee" in Section 2(14) and are, consequently, not capital assets. As a corollary, the receipt was not a capital receipt. Since it was concluded in the impugned order that a capital asset was transferred, notwithstanding the above conclusion, I briefly discuss the tenability of said conclusion next. 30. In this case, it is common ground that the petitioner did not exercise the Option in respect of any Vested ESOP and, consequently, shares of FPS were not issued....
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.... indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee.[ Substituted by Act 33 of 2009, Section 9, for Clause (vi) (w.e.f. 1.4.2010).] Explanation. - For the purposes of this sub-clause,- (a) "specified security" means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (47/ of 1956) and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme; (b)"sweat equity shares" means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; (c)the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares;"(emp....
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....strative of perquisite, it is not intended to tax the capital gains that may accrue if such specified security were to be sold by the allottee after capital appreciation. Instead, as the plain language indicates, clause (vi) takes within its fold and treats as a perquisite the benefit extended to the employee or any other person from and out of the grant of specified securities at concessional rates or free of cost. Additionally, in the specific context of ESOPs, Explanation (a) to sub-section (vi) explains the scope of "specified security" by using the expression "includes the securities offered under such plan or scheme". Interestingly, the phrase 'includes the securities allotted under such plan or scheme' is not used. The FSOP 2012 is admittedly a stock option plan or scheme within the meaning of Explanation (a) to clause (vi) of subsection (2) of Section 17. Given that the petitioner has not exercised the Option in respect of any of the 5924 ESOPs held by him, shares of FPS were not issued or allotted to him. The inference that follows is that "specified security", in the context of ESOPs, is not confined to allotted shares, but includes securities offered to the holde....
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....etween the fair market value of the shares on the date of exercise of the option and the price paid by the option holder. Unusually, in the current case, the assessee received a substantial monetary benefit at the pre-exercise stage by way of discretionary compensation for diminution in value of the Stock Options. I move next to the facts so as to examine whether the value of the perquisite can be determined in these circumstances. 38. From the material on record, it is not possible to discern the exercise price under the FSOP 2012. In any event, this is not material because the petitioner has not exercised the Option in respect of any of the 2137 Vested ESOPs. Effectively, no payments were made by the petitioner under the FSOP 2012 as on the record date. Nonetheless, by qualifying as an Employee under the FSOP 2012, the petitioner received compensation at the rate of USD 43.67 per ESOP on all 5924 ESOPs (both Vested and Unvested) held by him as on the record date. 39. In Commissioner of Income Tax, Bangalore v. Infosys Technologies Ltd. [(2008) 297 ITR 167 (SC)], the Supreme Court considered the question whether the issuer company was liable to deduct tax under Section 192 o....