TMI Blog2007 (12) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel submitted that the assessee left India on 27-10-1989, for taking up employment in the USA. According to the learned counsel, the assessee worked with various American companies till 5-7-1993 and joined Microsoft Corporation, USA, on 6-7-1993. According to the learned counsel, the assessee returned to India on 1-5-1999 and joined Microsoft India (R D) Pvt. Ltd., an Indian subsidiary of Microsoft Corporation, USA. The learned counsel again referred to section 5(1)( c ) of the Income-tax Act, 1961, and submitted that in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income accruing to that, person shall not be included in the total income. According to the learned counsel, stock option was given to the assessee when the assessee was working in the USA. According to the learned counsel, the stock option was granted in the year 1994 even before incorporation of the subsidiary company of Microsoft in India. According to the learned counsel, the subsidiary company was incorporated in India only in the year 1999. However, the stock option was granted in the year 1994 itself when the assessee was working with Micr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee worked with Microsoft Corporation, USA, in the USA. Microsoft Corporation approached the Authority for Advance Ruling with regard to income accrued to the employees in exercising stock option and subsequent sale of shares. The Authority for Advance Ruling, after considering the relevant provisions of law, found that the American company by devising the stock option scheme took upon itself the responsibility of paying, what must be regarded as salary , to the employees of the Indian company. Therefore, they are under an obligation under section 192 of the Income-tax Act to deduct tax at source on the amount payable to the employees. This decision of the Authority for Advance Ruling in Advance Rulings P. No. 15 of 1998 In re [1999] 235 ITR 565 1 . Since the Authority for Advance Ruling held that the income from sale of stock option exercised in the USA has to be treated as salary , according to the learned departmental representative, it is taxable in India. The learned departmental representative further pointed out that the assessee returned to India on 1-5-1999 and joined Microsoft India (R D) Pvt. Ltd. in India on 6-5-1999. According to the learned departmental rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding the relevant previous year, been in India for a period of 730 days or less, shall be treated as non-resident Indian . We have carefully gone through the judgment of the Gujarat High Court in the case of Pradip J. Mehta ( supra ). In the case before the Gujarat High Court, the assessee, during the last 9 previous year, was non-resident only for 3 years and during the last 7 previous year he had stayed in India for a period of 1,402 days. Therefore, the prayer of the assessee that he was not ordinarily resident was not accepted. The Gujarat High Court, after considering the various case laws on the subject including the decision of the Authority for Advance Ruling in Advance Ruling A No. P-5 of 1995 In re [1997] 223 ITR 379 , found that the status of the assessee for the period in question was Resident. His Lordship Hon ble Mr. Justice R.K. Abichandani, speaking for the Division Bench of the Gujarat High Court, has observed at page 654 of the report as follows: "The short contention raised for the assessee was that section 6(6)( a ) was applicable to this assessee who must be treated to be not ordinarily resilient in India, because, he was resident in India in eig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be not ordinarily resident for the purposes of the Act if he has not been in India for a period of seven hundred and thirty days or more during the seven years preceding the relevant previous year. That means, if an individual has been in India for seven hundred and thirty days or more during that period, he will not be said to be not ordinarily resident in India. In other words, for days which make up five years out of the preceding seven years, he should not have been in India for satisfying the second condition." In view of the above judgment of the Gujarat High Court, it is obvious that the stress is on presence of the assessee in India and not absence from India. The period of presence in India, in fact, will determine whether an individual is not ordinarily resident in India or not. In order to claim the status of not ordinarily resident , the assessee has to satisfy one of the two conditions prescribed under section 6(6)( a ) of the Income-tax Act. An individual who has not been resident in India within the meaning of section 6(1) of the Income-tax Act for less than 9 years out of 10 preceding years, does not satisfy the statutory criteria laid down for treati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident In view of the above, the assessee was resident only for three preceding previous years out of the relevant ten previous years. Further, the assessee s aggregate period of physical presence in India during the seven years preceding the relevant previous year is as below : Sl. No. Previous Year Stay in India Stay outside India 1. 1993-1994 0 365 2. 1994-1995 22 343 3. 1995-1996 0 365 4. 1996-1997 31 334 5. 1997-1998 0 365 6. 1998-1999 32 333 7. 1999-2000 335 30 Total 420 2135 The assessee s physical presence in India during the preceding seven previous years was only four hundred and twenty days, which is less than the prescribed seven hundred and twenty nine days." From the above, it is very clear that on the basis of the assessee s own admission the assessee was resident in India for three preceding years out of 10 preceding y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxability of income arising out of exercising of stock option. This issue also arises for consideration for assessment year 2000-01. The main contention of the learned representative for the assessee is that in view of proviso to section 5(1)( c ) of the Income-tax Act, the income which accrued outside India shall not be included in the total income of the non-resident Indian. As we have already discussed, the assessee is a Non-resident Indian. Therefore, we have to find out whether any income accrued in India or not. The contention of the assessee was that the stock option was granted in the year 1994 even before the incorporation of the subsidiary company of Microsoft in India. The case of the assessee was that the subsidiary company of Microsoft was incorporated in India in the year 1999. Therefore, the income, if any, on exercising such option is deemed to accrue outside India. The contention of the revenue is that even though the stock option was granted earlier, the assessee exercised the stock option on 24-4-2000 when he was in India. The further case of the revenue is that the income accrued to the assessee on the date on which the option was exercised. It is also the furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority further observed that it is a perquisite or profit arising out of the employment. Therefore, the Authority concluded that the profit arising out of exercising of the stock option shall be treated as salary . The contention of the Microsoft Corporation, USA, before the Authority for Advance Ruling was that the Stock Option Scheme was formulated by the American company and not by the Indian company and, therefore, it cannot be a perquisite or salary paid by the employer. While adjudicating this issue, the Authority for Advance Ruling found that the Indian Company was a fully owned subsidiary of the American company and the business of the Indian company was completely controlled by the parent company which is in America. The object of making such offer to the employees was only with a desire to give benefit to the employees at the same time enhancing their interest in the company. The Authority for Advance Ruling further found that the parent company made such an offer to the employees of the subsidiary company only because it regarded its subsidiary and itself as the same concern. It was further found that even if the subsidiary was treated as a separate juristic entity, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of the Stock Option Scheme is binding on the assessee also. Therefore, whatever is said by the Authority for Advance Ruling in respect of the Stock Option Scheme promoted by Microsoft Corporation, USA, is binding on the assessee and the Indian subsidiary company. In view of the above, the profit arising out of the exercising of stock option by the assessee is only a salary within the meaning of section 15 of the Income-tax Act. 12. Let us now examine whether the said profit accrued or arose to the assessee in India or outside India. We find that the Central Board of Direct Taxes considered this issue and issued instructions in Circular No. 710 dated 24-7-1995. The said circular is reported in (1995) 215 ITR 1 (Statutes). The said circular reads as follows : "1. Chief Commissioners and corporate assessees have been seeking clarification regarding taxability of the perquisite on shares issued to the employees at less than market price. 2. The matter has been considered by the Board. The benefit does amount to a perquisite within the meaning of clause ( iii ) of sub-section (2) of section 17 of the Income-tax Act, 1961. The various situations in this regard have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h belongs to Shipping Corporation of India is taxable in India since it was received on the Indian ship. On those facts and circumstances, the Bombay High Court found that section 5(1) of the Income-tax Act deals with the scope of total income . The income received by a non-resident Indian outside India shall not form part of the total income. In the case of a non-resident, income which accrues to him in India or which is received by him in India alone is taxable. After referring to section 9(1)( ii ) of the Income-tax Act, the Bombay High Court found that the relevant test to be applied is where the services have been rendered. If the services were rendered in India, it shall be treated as income earned in India. Therefore, even though the said income was received by a non-resident Indian, it was taxable under the Income-tax Act if the said income was received in respect of services rendered in India. 14. The next question which falls for our consideration is where the assessee rendered service for the purpose of exercising the stock option under the scheme promoted by Microsoft Corporation. The fact as found by the Authority for Advance Ruling shows that the employees of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option to the employees subject to some conditions. In those facts and circumstances, the Karnataka High Court found that the trust, after noticing the eligibility and other conditions stipulated, had chosen to provide a stock option to the employees. There was no ascertainable value attached to the shares transferred. The shares were allotted to the trust and not to the employees by the company. The grant had been made by the trust. Therefore, it did not amount to perquisite/salary. After referring to the decision of the Authority for Advance Ruling in the case of Microsoft Corporation, the Karnataka High Court found that the facts of the case stood on a different footing. In view of section 245S of the Income-tax Act, the decision rendered by the Authority for Advance Ruling in respect of transaction viz., stock option granted to the employees of the Indian subsidiary company of Microsoft Corporation is binding not only on the company but also on the employees since the subject-matter of transaction is one and the same. Therefore, in our opinion, the judgment of the Karnataka High Court is not of any assistance to the assessee. In view of the specific provisions contained in se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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