TaxTMI 
TaxTMI 
2026 (8) TMI 676
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....sition of the shares acquired under an ESOP scheme would be tantamount to taxing the perquisites under the head capital gains, at a different c. The AO erred in failing to appreciate that taxing the perquisites, albeit under a different head of income and at a different point in time, would be tantamount to taxing the perquisites received in respect of services outside India, which cannot be deemed to accrue or arise in India under 9(1)(ii) of the Income tax Act, 1961. d. The AO has erred in not considering that taxing the perquisites in the aforesaid manner would be in violation of Article 15 of the India-UK tax treaty, which restricts India from taxing perquisites earned in respect of services rendered outside India. e. The AO has erred in concluding that the shares received under the ESOP scheme by the assessee do not constitute perquisites merely because they do not accrue or arise in India under section 9(1)(ii) of the Income-tax Act 1961. The AO has erred in computing the assessee's capital gains without regard Section 49(2AA) of the Income-tax Act, 1961. g. The AO erred in computing the assesee's capital gains by reference....
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....ny return of income in lieu of the notice issued u/s 148 and thus statutory notice issues u/s 142(1) was issued to the assessee on the primary mail registered with the ITBA portal on 24/08/2023, 20/09/2023, 18/10/2023, 19/10/2023 and 10/01/2024. 2.2. The assessee vide various replies to these statutory notices filed submissions which is summarised as under:- (a) It was submitted that assessee did not file the return of income for the relevant assessment year under consideration, as he was unaware about the requirements to file the return of income of India. He was not aware about the legal provisions regarding the return filing and tax payment in India. It was submitted that the assessee had no intention of avoiding or evading the taxes in India by not disclosing the income in India. (b) The assessee submitted that during the year under consideration he was a non-resident of India. During the relevant previous year, the assessee exercised Employee Stock Option Plans (ESOPs) and was allotted 1,540 shares at an exercise price of Rs. 1 per share. It was submitted that the fair market value (FMV) of the shares on the date of exercise was Rs. 1,754 per share. ....
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.... entire sale consideration realised on transfer of the shares inherently included the value which had already suffered tax as a perquisite in the United Kingdom and, therefore, taxing the same again without allowing such value as the cost of acquisition would amount to double taxation of the same economic benefit. (i) The assessee also drew a comparison with the position of a resident employee. It was submitted that where a resident employee is taxed on the perquisite value under section 17 of the Act at the time of exercise of ESOPs, section 49(2AA) expressly permits the fair market value so adopted to be treated as the cost of acquisition while computing capital gains. According to the assessee, a non-resident employee, whose perquisite value has been subjected to tax in the United Kingdom, should receive identical treatment by adopting the fair market value as the cost of acquisition. (j) The assessee accordingly contended that denial of such benefit solely because the perquisite had been taxed in the United Kingdom instead of India would result in discriminatory treatment and would be contrary to the non-discrimination provisions contained in Article 26 of the....
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....2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall not be taxed in that other State if : (a) he is present in the other State for a period or periods not exceeding in the aggregate 183 days during the relevant fiscal year; (b) the remuneration is paid by, or on behalf of, an employer who is not resident of that other State; and (c) the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that other State. 3. Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft in international traffic may be taxed in the Contracting State of which the person deriving the profits from the operation of the ship or aircraft is a resident." Thus, as per the Act and also as per the Article 16 of INDIA UK DOUBLE TAXATION AVOIDANCE TREATY the accrual of the Salary and Perquisites is outside India. 3.2.A].5] Employee and Employer Relation: Although the employee and employer relation is of no materiality, ....
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.... 3.2.B].i) Notwithstanding the above considering Article 24 of the INDIA UK DOUBLE TAXATION AVOIDANCE TREATY (DTAA) "ARTICLE 24 - Relief from double taxation - 1. Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof): (a) Indian tax payable under the laws of India and in accordance with the provisions of this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within India (excluding, in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the Indian tax is computed. (b) In the case of a dividend paid by a company which is a resident of India to a company which is a resident of the United Kingdom and which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividend, the credit shall take into ac....
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....-93, dated 30-3-1990 and similar Orders from time to time published in the Official Gazette by the Central Government under power conferred on it by section 3 of the Import and Export (Control) Act, 1947 (18 of 1947). 4. The provisions referred to in this paragraph are : (a) sections 10(4), 10(4B), 10(6)(viia), 10(15)(iv), 33AB, 80HHD, 80-I and 80-IA; (b) any other provision which may subsequently be enacted granting an exemption or reduction from tax which is agreed by the competent authorities of the Contracting States to be of a substantially similar character to a provision referred to in subparagraph (a) of this paragraph, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character; (c) sections 10A and 10B. 5. Relief from United Kingdom tax shall to be given by virtue of this paragraph 3 of this Article in respect of income from any source if the income relates to a period starting more than 10 fiscal years after the deduction in computing taxable income or exemption from, or reduction of, Indian tax is first granted to the resident of the United Kingdom or to the resident of India, as the case....
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....ee preferred objections before DRP. 3. The DRP after considering various submissions of assessee, observed and held as under:- "9.4.3 The Panel is in agreement with the findings of the AO. The shares of LTIMindtree Limited received by the assessee accrues in the form of capital asset as per Section 5(2) r.w.s. 9(1)(i) of the Act. Thus, on the transfer of these capital assets, there arises liability of the capital gains, which is payable in India. The cost of acquisition allowable to the extent of the actual consideration paid. The cost of acquisition is simply the consideration paid by the assessee for acquiring the assets, which is the actual cost paid by the assessee for acquiring the asset and not the fair market value as claimed by the assessee. 9.4.4 The applicant assessee has relied upon the decision of Hon'ble ITAT Bangalore delivered in the case of Biplab Adhya IT(IT)ANO.720/Bang/2022. The Panel has perused the case. However, the Panel is of the opinion that facts of the cases are not similar. In the case of Biplab Adhya, the assessee has paid taxes in USA (as perquisite) on Rs. 1,41,45,894 and in India for a sum of Rs. 72,27,669. Therefore....
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....re, according to the Ld. AR, the perquisite was neither received nor deemed to accrue or arise in India and consequently fell outside the scope of total income under section 5 of the Act. It was, therefore, submitted that the said perquisite was not chargeable to tax in India. 4.2. The Ld. AR submitted that before the authorities below the assessee had furnished the computation of short-term capital gains wherein a short-term capital loss of Rs. 1,00,650/- was computed by adopting the fair market value of the ESOP shares as on the date of exercise as the cost of acquisition in terms of section 49(2AA) of the Act. It was submitted that section 49(2AA) specifically provides that where capital gains arise from the transfer of specified securities or sweat equity shares referred to in section 17(2)(vi), the cost of acquisition shall be the fair market value which has been taken into account for the purposes of the said provision. It was further submitted that the fair market value was determined in accordance with Rule 3(8)(ii) of the Income-tax Rules. 4.3. The Ld. AR submitted that for the purposes of computing capital gains under section 48 of the Act, the expression "cost of a....
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....endered outside India. Consequently, the alleged perquisite neither accrued nor arose in India, nor could it be deemed to accrue or arise in India within the meaning of section 5 of the Act. It was contended that section 4, being the charging provision, brings to tax only such income as forms part of the total income under the Act. Since the perquisite did not fall within the ambit of section 5, the same could not be regarded as taxable income in India. 4.7. The Ld.AR further submitted that once the perquisite itself does not accrue or arise, or is not deemed to accrue or arise in India under section 5, the deeming provisions contained in section 9(1)(ii) would also have no application. It was contended that the authorities below erred in invoking Article 16 of the India-UK Double Taxation Avoidance Agreement dealing with dependent personal services. According to the Ld.AR, the perquisite value had already been subjected to tax as salary income in the United Kingdom and India had no right under the Treaty to tax the same again. It was submitted that once the Treaty allocates taxing rights to one Contracting State, the same income cannot again be subjected to tax in the other Con....
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.... case, however, the residential status of the assessee as a non-resident was never in dispute. Attention was invited to the assessment order itself, wherein the Ld. AO had accepted the assessee's non-resident status, as also to the Tax Residency Certificate issued by the UK tax authorities, placed at page 204 of the paper book, certifying that the assessee was a tax resident of the United Kingdom for the period from 01.04.2018 to 31.03.2019. It was, therefore, submitted that the authorities below erred in relying upon decisions rendered in materially distinguishable factual circumstances and that the perquisite value was not chargeable to tax in India. 4.12. On the contrary, the Ld. DR supported the orders of the authorities below. He submitted that the shares transferred by the assessee were equity shares of LTI Mindtree Ltd., an Indian company, though allotted under the ESOP scheme of its group entity, LTI Mindtree UK Limited. It was, therefore, contended that the capital gains arising on the transfer of shares of an Indian company were chargeable to tax in India in accordance with the provisions of the Act. The Ld. DR further submitted that the Ld. AO had correctly adopte....
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.... of the shares of an Indian listed company at an exercise price of Re.1 per share and subsequently transferred those shares through the stock exchange. It is further noted that the fair market value adopted by the assessee for determining the perquisite value has not been disputed by the Ld.AO. Rather, the Ld.AO proceeded on the basis that the fair market value adopted by the assessee has been determined in accordance with Rule 3(8)(ii) of the Income-tax Rules. Thus, there is no dispute before us regarding the determination of the fair market value of the shares on the date of exercise of the options. 5.4. It is submitted by the Ld.AR that the difference between the fair market value of the shares on the date of exercise and the exercise price was subjected to tax in the UK as perquisite forming part of the assessee's salary income. However, the Ld.AO proceeded on the footing that the difference between the fair market value of the shares on the date of exercise and the exercise priceis not taxable as per the DTAA and provisions of section 5 of the Act. The Ld.AO therefore denied the benefit under the provisions of section 49(2AA) to the assessee. 5.5. In the above factua....
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....nder section 17. The expression "taken into account" is of wider import and merely refers to the fair market value determined in accordance with the statutory mechanism prescribed under section 17(2)(vi) read with Rule 3 of the Income-tax Rules. The chargeability of such perquisite to tax is governed independently by sections 4, 5 and 9 of the Act and, where applicable, by the provisions of the relevant DTAA. 5.8. In other words, it refers to the fair market value which enters into the determination of the value of the perquisite in accordance with the mechanism prescribed under section 17(2)(vi) read with Rule 3 of the Income-tax Rules. The provision does not stipulate that such perquisite should have actually been subjected to tax in India or included in the total income of the assessee. The distinction is significant because the computation of the perquisite under section 17(2)(vi) and its ultimate chargeability to tax operate in different fields. In other words, it refers to the fair market value which enters into the determination of the value of the perquisite in accordance with the mechanism prescribed under section 17(2)(vi) read with Rule 3 of the Income-tax Rules. The ....
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....nding that the fair market value has been determined in accordance with the statutory mechanism prescribed under section 17(2)(vi) read with Rule 3, did not directly arise for consideration therein. We have, therefore, independently examined the language employed in section 49(2AA) and, for the reasons recorded hereinabove, are unable to read into the provision a condition which the Legislature has consciously not incorporated. 5.12. Equally, we are unable to subscribe to the reasoning adopted by the DRP while distinguishing the decision of Hon'ble Bangalore Bench of this Tribunal in case of Biplab Adhya(supra) solely on the ground that, in that case, the perquisite had suffered tax in India whereas, in the present case, it has suffered tax in the United Kingdom. In our considered opinion, the applicability of section 49(2AA) cannot depend upon the jurisdiction in which the perquisite has been subjected to tax, since the provision itself makes no such distinction. Once the fair market value has been determined and taken into account for the purposes of section 17(2)(vi), the statutory requirement of section 49(2AA) stands satisfied. To import an additional condition that the per....