1998 (11) TMI 672 - AAR - Income Tax

Summary

Issues Involved:
1. Whether money received by the employees of the Indian subsidiary, by exercise of stock option granted to them, constitutes income from salaries.
2. Whether tax has to be deducted u/s 192 of the Income-tax Act, 1961, by the applicant-company on the amount earned by the employees of the subsidiary from the exercise of stock option granted to them.

Summary:

Issue 1: Income from Salaries
The applicant, a US-based company, proposed a stock option agreement for employees of its fully owned Indian subsidiary. The employees could subscribe to shares of the US company at a pre-determined price lower than the market price, sell them in the US market, and repatriate the net gain to India. The core question was whether the money received by the employees from this scheme constitutes income from salaries.

The ruling referenced cases such as Bentley v. Evans and Abbott v. Philbin, which dealt with similar issues under English law. It was established that the benefit derived from stock options is a perquisite or profit arising out of employment. Under Indian law, "salary" includes perquisites or profits in lieu of or in addition to any salary or wages as defined u/s 17. The court concluded that the benefit from the stock option scheme, offered by the American parent company to the employees of the Indian subsidiary, constitutes additional remuneration and thus falls under the definition of "salary" u/s 15 and 17 of the Income-tax Act.

Issue 2: Tax Deduction u/s 192
The second issue was whether the applicant-company must deduct tax at source u/s 192 on the amount earned by the employees from the stock option scheme. The court noted that the American company, by offering the stock option, effectively took on the responsibility of paying what is considered "salary" to the employees of the Indian subsidiary. Consequently, the provisions of section 192, which mandate the deduction of tax at source on salary payments, were applicable. The American company was thus obligated to deduct income tax at source before making any payments to the employees.

Conclusion
The Authority for Advance Rulings concluded that:
1. The money received by the employees from the exercise of the stock option constitutes income from salaries.
2. The applicant-company is required to deduct tax at source u/s 192 on the amount earned by the employees from the stock option scheme.

Both questions were answered in the affirmative and in favor of the Revenue.