Article 15, India-UAE DTAA – Section 5, section 17(2)(vi) of the Act – ESOP benefit had accrued at the stage of grant when assessee was resident – Section 17(2)(vi) provides time when ESOP is to be taxed – Hence ESOP benefit will be taxable notwithstanding that assessee is non-resident on exercise date – ESOP benefit is taxable in country where services are rendered – Residential status at the time of exercise of ESOP is not relevant

Article 15, India-UAE DTAA – Section 5, section 17(2)(vi) of the Act – ESOP benefit had accrued at the stage of grant when assessee was resident – Section 17(2)(vi) provides time when ESOP is to be taxed – Hence ESOP benefit will be taxable notwithstanding that assessee is non-resident on exercise date – ESOP benefit is taxable in country where services are rendered – Residential status at the time of exercise of ESOP is not relevant

 

FACTS

The assessee was an employee of an Indian bank. He was deputed to the UAE Representative Office (RO) from 1st October, 2007. Since deputation, the assessee was a non-resident, including in the years in dispute. During the relevant years, the assessee was granted stock options by the Indian bank in June, 2007 which vested equally in June, 2008 and June, 2009. The assessee exercised the vested options in F.Ys. 2012-13 and 2013-14 when he was a non-resident. On exercise of options, the employer had withheld tax which the assessee claimed as refund in his tax return. According to the assessee, he was granted ESOP benefit in consideration of services rendered to the RO outside India and hence the income neither accrued nor arose in India, nor was it deemed to accrue or to arise in India or received in India. Alternatively, it was not taxable in India as per Article 15(1) of the India-UAE treaty since the employment was not exercised in India.

But as per the A.O., ESOP benefit was granted in consideration of services rendered in India in 2007 when the assessee was a resident. Accordingly, the A.O. held that ESOP benefit was taxable in India under the Act as also under the DTAA.

The CIT(A) upheld the order of the A.O. Being aggrieved, the assessee filed an appeal before the Tribunal.

HELD

Taxability under Act

•    While ESOP income had arisen to the assessee in the year of exercise, admittedly the related rights were granted to the assessee in 2007 and in consideration of the services which were rendered by the assessee prior to the rights being granted – which were rendered in India all along.

•    At the stage when the ESOP benefit was granted in 2007, the income may have been inchoate, yet it had accrued or arisen in India in the year of exercise.

•    Section 17(2)(vi) decides the timing of taxation of the ESOP in the year of exercise but does not dilute the fact that ESOP benefit had arisen at the time when the ESOP rights were granted when the assessee was a resident. Section 17(2)(vi) merely deferred its taxability to the year of exercise. Accordingly, income was taxable in the year of exercise notwithstanding that the assessee was a non-resident during those years.

•    Reference to the UN Model Convention 2017 Commentary also makes it clear that ESOP benefit relates back to the point of time, and even periods prior thereto, when the benefit is granted. Hence, it cannot be considered as accruing or arising at the point of exercise.

Taxability under Article 15 of DTAA

•    ESOP benefit could be taxed as ‘other similar remuneration’ appearing alongside salaries and wages in Article 15 of the India-UAE DTAA.

•    Article 15(1) provides that other remuneration (which includes ESOP benefit) can be taxed in the state where employment is exercised. Accordingly, ESOP benefit in respect of employment in the UAE was taxable in the UAE even if the ESOP was exercised after returning to India and on cessation of non-resident status. Similarly, ESOP benefit in respect of service rendered in India was taxable in India notwithstanding that ESOP benefit was exercised when the assessee was a non-resident.

•    The decisions such as in ACIT vs. Robert Arthur Kultz [(2013) 59 SOT 203 (Del.)] and Anil Bhansali vs. ITO [(2015) 53 taxmann.com 367 (Hyd.)] relied upon by the taxpayer, in fact, favour the Revenue since they lay down the proposition that if ESOP benefit is received for rendering services partly in India and partly outside India, only the pro-rata portion relatable to services rendered in India is taxable in India.

Note: The Tribunal seems to have premised its decision on the fact that ESOP benefit in the present case was granted in lieu of services rendered in India prior to the date of grant. Hence, the Tribunal did not consider employment exercised in the UAE (October, 2007 to June, 2009) during substantial part of grant to vest period (June, 2007 to June, 2009) as diluting accrual of the salary income in India. Incidentally, during the erstwhile Fringe Benefits Tax (FBT) regime, FAQs 3 to 5 of CBDT Circular No. 9/2007 dated 20th December, 2007 clarified that FBT on ESOPs will trigger on pro-rata basis for employment exercised in India during grant to vest period. This Circular is not referred to in the Tribunal decision.