The ITAT Mumbai had to consider two questions of law:

1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (A) has erred in upholding the action of the learned Assessing Officer to tax Employee Stock Option as perquisite u/s 17.

2. Without prejudice to above, on the facts and in the circumstances of the case and in law, the CIT(A) has erred in concluding that the Appellant is not entitled for relief from taxability of perquisite in the form of Employee Stock Options, under the provisions of Section 90 of the Act read with Double Taxation Avoidance Agreement between India and UAE (‘DTAA’);

The Bench comprising of Pramod Kumar (Vice President) and Saktijit Dey (Judicial Member) held as follows:

It would thus seem that the scheme of Article 15 permits taxation of ESOP benefit, which is included in the scope of the expression “other similar remuneration” appearing immediately after the words “salaries and wages”, in the jurisdiction in which the related employment is exercised. Thus, in case the assessee is to get ESOP benefits in respect of his service in U.A.E. and he exercises these options at a later point of time, say after returning to India and ceasing to be a non-resident, he will still have the treaty protection of that income under article 15(1).

This principle, however, is not a one-way route. Conversely, when the assessee gets the ESOP benefit on account of rendering services in India, he cannot have the benefit of article 15 in respect of the said income. The reason is simple. Article 15(1) itself provides that “salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State” and so far as the “other similar benefits” are concerned, which include the ESOP benefits, the employment is exercised in the other contracting State, i.e., in India.

As much as the nexus is required to be between salaries and wages vis-à-vis the employment, the nexus is also required between other similar benefits vis-à-vis the employments; what hold goods for the former holds good for the latter as well. In the absence of nexus of ‘other similar benefits’, as wages and salaries, received by the assessee vis-à-vis his employment in the U.A.E., the treaty protection of the said income in India cannot be available to a resident of the U.A.E.

As regards learned counsel’s reliance on the coordinate bench decision in the case of ACIT Vs Robert Arthur Kultz [(2013) 59 SOT ITA Nos. 1200 and 1201/Mum/2018 Assessment years: 2013-14 and 2014-15 203 (Del)], we find that this decision is in favour of the revenue inasmuch as it holds that “In this case it is not in dispute that the assessee was in India only for a short period i.e. 1.4.2006 onwards and that prior to it, he has not done any service connected with any activity in India.

Thus applying the propositions laid down in these cases, to the facts of the case on hand, as the assessee has not rendered service in India for the whole grant period, only such proportion of the ESOP perquisite as is relatable to the service rendered by the assessee in India is taxable in India”. The treaty protection was thus extended in this case even though the assessee received the ESOP benefits in India. Simialr was the position in the case of Anil Bhansali Vs ITO [(2015) 53 taxmnann.com 367 (Hyd)], relied upon by the learned counsel, wherein it was held, as very well summed up in the head notes, that “Where assessee, having residential status of ‘resident but not ordinarily a resident’ received certain amount as Stock Option Transfer Proceeds (SOTP) from its employer company, for rendering services partly in India and partly in USA, only that portion of SOTP was taxable in India which was attributable to services rendered in India”.

These judicial precedents do not support the case of the assessee at all. Learned counsel has also cited a large number of judicial precedents at the bar, but admittedly none of these decisions do not directly cover the issue in appeal before us, and, upon our careful perusal of these judicial precedents, we find them of no relevance at all. The assessee’s claim for the treaty protection is thus equally devoid of legally sustainable merits, and we reject the same.