Income Tax, Issue Update

Taxation of Employee stock option plan: Requirement to deduct tax at source under section 192

Case: NXP India Pvt Ltd vs. Deputy Commissioner of Income Tax, Circle-5(1)(1), Bangalore ITAT

Outcome: Remand


  • The stock- based compensation plans were introduced by the ultimate holding company NXP Semiconductors N.V. in 2007 wherein certain employees of NXP India have been granted options and restricted stock units under these plans.
  • The compensation cost was amortised over the vesting period of the options. Accordingly, the company had recorded compensation cost for all grants made to its employees by the ultimate holding Company using the fair value based method of accounting. The provision for compensation cost recognized for the year ended 31.03.2012 was Rs. 65,23,426.
  • The said provision, being incurred during the normal course of the business, was considered as an allowable expenditure for the purpose of computation of income.
  • The Dispute Resolution Panel was of the view that there were four stages in the grant of the employee stock option plan, viz., (i) Granting of option, (ii) Vesting of option, (iii) Exercise of option, and (iv) Selling shares. Normally, the ESOP was designed in such a way that there is a gap of one or more years between each of the first three stages.
  • The decision relied upon by the Assessee in the case of Biocon also held that the expenditure is allowable at the time of vesting. Hence, the tax at source on perquisite amount arising out of the vesting transaction must have been deducted by the Assessee.

Key Points

  • The Tribunal placed reliance on the decision laid down by the Hon’ble Supreme Court in the case of Commissioner of Income Tax v. Infosys Technologies Limited wherein it was held that if the shares allotted to the employee had no realizable sale value on the day when he exercised his option then there was no cash inflow to the employee. It was not possible for the employee to know the future value of the shares allotted to him on the day he exercises his option.
  • Being so, the judgment of the Hon’ble Supreme Court in the case of Infosys Technologies Limited was squarely applicable to the facts of the case. Accordingly, the element of shares to employees under employee stock option plan could not be treated as perquisite as there was no benefit and value of benefit, if any, was un-ascertainable at the time when the options were exercised.
  • Hence, tax was not required to be deducted under section 192 by the Assessee.

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