| Case ID |
21552bda-1b85-47c4-ba0f-a539083a5ac3 |
| Body |
View case body. Login to View |
| Case Number |
CIVIL APPEAL NO. 3725 OF 2007 |
| Decision Date |
Jan 04, 2008 |
| Hearing Date |
|
| Decision |
The Supreme Court of India dismissed the civil appeals filed by the Commissioner of Income-tax, Bangalore against Infosys Technologies Ltd. The court held that the department had erroneously treated the difference between the market value of shares and the amount paid by employees upon exercising their stock options as a perquisite taxable under the Income Tax Act. The court clarified that the lock-in period and the non-transferability of shares during this period meant that employees did not receive any tangible benefit or cash inflow at the time of exercising the options. Consequently, the department was in error for not deducting TDS under section 192, and the appeals were dismissed without any order as to costs. |
| Summary |
In the landmark case of Commissioner of Income-tax, Bangalore v. Infosys Technologies Ltd., reported in 2008 SLD 2842 and (2008) 297 ITR 167, the Supreme Court of India adjudicated on the tax implications of the Employees Stock Option Scheme (ESOP) implemented by Infosys Technologies Ltd. The core issue revolved around whether the benefits derived by employees through the ESOP constituted taxable income under the Income Tax Act, 1961, specifically sections 17(2), 192, and 201, as amended by the Finance Act, 1999.
Infosys, a leading public limited IT company based in Bangalore, had instituted an ESOP where a trust, named Technologies Employees Welfare Trust, was created to manage and allot 750,000 warrants at Re. 1 each to employees based on performance and other criteria. These warrants allowed employees to purchase equity shares of face value Rs. 10 each at a total consideration of Rs. 100 per share. The ESOP stipulated a minimum retention period of one year for the warrants, post which employees could exercise their options by paying the remaining Rs. 99. However, the allotted shares were subject to a strict five-year lock-in period during which they were non-transferable and had no realisable market value. Any resignation or termination during this period resulted in the forfeiture of the shares, which were then re-transferred to the trust at Rs. 100 per share.
During the assessment years 1997-98 to 1999-2000, the Assessing Officer (AO) calculated the 'perquisite value' of the ESOP benefits by taking the difference between the market value of the shares on the date of exercise (Rs. 171 crores) and the amount paid by employees (Rs. 6.64 crores), resulting in a perquisite value of Rs. 165 crores. Consequently, the AO treated Infosys as a defaulting taxpayer for failing to deduct Tax Deducted at Source (TDS) under section 192 of the Income Tax Act, amounting to Rs. 49.52 crores. These orders were upheld by the Commissioner of Appeals.
Infosys appealed to the Tribunal, which ruled that the ESOP benefits did not qualify as a 'perquisite' under section 17(2)(iii) of the Income Tax Act. This decision was subsequently affirmed by the Karnataka High Court. The central question before the Supreme Court was whether the ESOP benefits should be treated as taxable income at various stages of the option lifecycle, including grant, vesting, exercise, removal of lock-in conditions, or sale of shares.
The Supreme Court meticulously analyzed the nature of the warrants and the lock-in period. It determined that warrants merely conferred a right to purchase shares without any obligation, and thus, did not constitute a perquisite at the time of grant or vesting. More critically, the lock-in period rendered the shares non-transferable and deprived employees of any immediate economic benefit upon exercising the options. The court highlighted that the shares could not be hypothecated or pledged during the lock-in period and had no marketable value, negating any form of cash inflow or tangible benefit that could be deemed income.
Furthermore, the court addressed the retroactive application of the Finance Act, 1999. It concluded that the insertion of section 17(2)(iiia) was not retrospective, as there was no legislative intent to that effect. The definition of 'cost' and 'specified securities' under the new clause was introduced expressly for future transactions post-1-4-2000 and could not be applied to existing awards retrospectively.
Applying the principle that a benefit must be explicitly made taxable to be considered income, the Supreme Court ruled that during the assessment years in question, the ESOP benefits were not taxable. The court observed that potential benefits, unexercised options, and shares under lock-in did not meet the threshold of 'income' as per the Income Tax Act. Consequently, the department's treatment of the ESOP benefits as taxable perquisites was flawed.
In conclusion, the Supreme Court dismissed the civil appeals, thereby absolving Infosys Technologies Ltd. from the obligation to deduct TDS under section 192 for the ESOP benefits during the specified assessment years. This judgment underscored the importance of clear legislative definitions and the necessity of explicit provisions for benefits to be taxed as income. It provided a pivotal interpretation of how ESOPs are treated under Indian tax laws, emphasizing the need for tangible economic benefits and transferability for benefits to qualify as taxable income. This case has significant implications for IT companies and other corporations in structuring their employee benefit schemes to ensure tax compliance while providing equitable incentives to their workforce. |
| Court |
Supreme Court of India
|
| Entities Involved |
Infosys Technologies Ltd.,
Commissioner of Income-tax, Bangalore,
Technologies Employees Welfare Trust,
Employees Stock Option Scheme (ESOP)
|
| Judges |
S.H. Kapadia,
B. Sudershan Reddy
|
| Lawyers |
Vikas Singh,
Ms. Amrita Narayan,
Ms. Shilpa Singh,
B.V. Balaram Das,
Harish N. Salve,
Arvind P. Datar,
Ms. Haripriya Padmanabhan,
Ms. Senthil Jagadeesan,
Ms. Meenakshi Grover,
Ms. Gayatri Goswami,
Kamal Deep Dayal,
Ms. Christi Jain
|
| Petitioners |
Commissioner of Income-tax, Bangalore
|
| Respondents |
Infosys Technologies Ltd.
|
| Citations |
2008 SLD 2842,
(2008) 297 ITR 167
|
| Other Citations |
Govind Saran Ganga Saran v. CST [1985] 155 ITR 144 (SC),
CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC)
|
| Laws Involved |
Income Tax Act, 1961,
Finance Act, 1999
|
| Sections |
17(2),
192,
201,
17(2)(iiia)
|