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Section 17(2) of the Act- Benefits obtained under Stock Appreciation Rights (SAR s plan) received by employees of an Indian company (I Co) from ICo’s parent in USA (US Co) and exercised while the Taxpayers were resident – taxable in India as salary income in the hands of the employees.
Facts
Taxpayers were employees of I Co, a subsidiary of US Co. US Co rolled out a Stock Appreciation Rights plan (SARs plan) under which Taxpayers, as Employees of I Co, became eligible and received options under the SARs plan.
As per the terms of the SARs plan, Taxpayers were not offered any security or sweat equity shares, but, were given a right to receive cash equivalent of the appreciated value of certain specified number of securities of US Co. The rights under the SARs plan, vested in the Taxpayers while they were working outside India and were Nonresident (NRs). Rights were however exercised by the Taxpayers when they were residents of India. I Co withheld tax on benefit received by the Taxpayers under the SARs plan by treating it as salary Income. US Co also withheld taxes payable in the USA on the same benefits. Taxpayers in the return of income filed in India claimed that the SARs benefits were not taxable as salary Income. This claim was rejected by the A.O.
The First Appellate Authority confirmed A.O.’s action of taxing the SARs as Salary Income. Being aggrieved, Taxpayers appealed to the Tribunal.
Held
The Tribunal ruled in favor of the A.O. and upheld salary taxation on the following grounds:
SARs are not capital assets
• The Taxpayers were merely given the right to receive appreciation in value of shares in cash, and not shares itself. Hence, SARs did not represent capital assets. They were revenue receipt.
• The SARs were given to the Taxpayers as compensation for services rendered to I Co. They did not represent transfer of capital asset or termination of any source of income.
• Amount received under SARs was a revenue receipt.
The SAR benefit is taxable as Salary Income despite absence of a direct employer-employee relationship with US Co
• SARs were given to employees who are connected, directly or indirectly, with US Co so as to motivate the employees to perform their best work. But for employment with I Co, the Taxpayers would not have received the benefits. The SARs benefitted I Co directly and US Co indirectly.
• US Co promoted the SARs scheme to promote its business and for commercial expediency. The Taxpayers enriched themselves by accepting the offer.
• The SARs were in addition to salary for services rendered to I Co and, hence, they were taxable as salary, being benefit in lieu of salary for services rendered.
SARs trigger taxation in India if the exercise happens when a taxpayer is resident in India
• The Taxpayers exercised the SARs options when they were residents in India. Merely because the vesting happened when the Taxpayers were NRs and working outside India, does not relieve taxation at the time of exercise.
