Taxes are not required to be deducted at source at time of grant of ESOP

The Mumbai Bench of the Income Tax Appellate Tribunal held that the taxes are not required to be deducted at source at the time of grant of ESOP (Employee Stock Ownership Plan).

A Division Bench of Justice Rahul Chaudhary and Accountant Member Prashant Maharishi observed that “Provisions of TDS are enacted with the basic objective of ‘pay [tax] as you earn’. Further, TDS is considered as advance tax paid in the hands of the recipient of income. Therefore, the taxes are not required to be deducted at source at the time of grant of ESOP but at the time of option is exercised by employees of the assessee and shares are allotted to the employees, because it is that time it is taxable in the hands of employees.”

Advocate Ketan Ved appeared for the Petitioner whereas Advocate Abul Kadir Jawadwala appeared for the Respondent. 

The brief facts of the case were that the respondent deals in business segments like lubricants for automotive and industrial applications, liquefied petroleum gas for domestic and commercial applications, other products, and special fluids. As there was a significant decrease in the tax deduction at source in the case of a company compared to earlier years, verification was conducted by The Deputy Commissioner of Income Tax. During the course of verification, it was found that the respondent has failed to deduct tax at source on the employees’ share-based payments, The Company is liable to deduct tax at source on expenses debited in the books of account of ₹ 215,069,651 and the respondent has failed to deduct tax at source on discount and rebates amounting to ₹ 399,200,000 under section 194H of the act. Accordingly, an order under section 201 (1) /201 (1A) of the act was passed under which the respondent was found to be in default for a tax deduction and Interest was also chargeable. Respondent appealed before the National Faceless Appeal Centre Delhi, where his appeal was allowed and held that no taxes were required to be deducted from the above sum based on the written submission made by the respondent.

Consequently, the DR in rejoinder submitted the agreement for distributor with an agent and not on a principal-to-principal basis. Further year-end provisions are identified provisions, so the decision cited by the AR does not apply.

After considering the submission, the Bench noted that the only issue involved in this appeal is whether taxes are required to be deducted on several payments made by the assessee or provisions of expenditure.

The Bench stated that the taxes are not required to be deducted at source at the time of grant of ESOP but at the time of option is exercised by employees of the assessee and shares are allotted to the employees, because it is that time it is taxable in the hands of employees.

The Bench also stated that no taxes were required to be deducted at source at the time of granting of such option and when the assessee has deducted tax at source on allotment of performance shares, the assessee could not be said to be in default for non-deduction of tax.

Referring to the case of Palam Gas Services [2017] 81 taxmann.com 43 (SC), the Bench Reiterated that “at page number 91 of the paper book wherein the identification of the vendor, permanent account number, particulars of the head under which tax is required to be deducted mentioning the section, the amount paid or payable, TDS amount deductible but not deducted.”

The Bench also refers to the case of CIT versus Intervet India Private Limited [(2014) 49 taxmann.com 14] wherein it is held that where the assessee offered incentive to Distributors and stockiest meeting of the sales target on a ‘principal to principal’ basis that incentive could not be treated as commission payment subject to tax deduction at source under section 194H of the act.

Accordingly, the Bench partly allowed the appeal and directed the AO to compute interest u/s 201 (1A) of the Act to the extent and period of TDS to be deducted by the assessee and taxes paid by the payees.

Cause Title: The Deputy Commissioner of Income Tax, (OSD) TDS Vs. Total Energies Marketing India Pvt. Ltd. [ITA Nos. 127 to 133/MUM/2023 / 2023-Enterslice-32-ITAT-Mum]

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