The Delhi High Court quashed an order passed under Section 197 of the Income Tax Act, 1961 in the matter relating to the one-time voluntary payment by FPS (Flipkart Pvt. Ltd., Singapore) to option holders on disinvestment of PhonePe business.
The FPS announced the disinvestment of its whollyowned subsidiary called PhonePe. Thereafter, the value of the stock options of FPS fell pursuant to the disinvestment and subsequent remittances to the shareholders of FPS on account of dividend payments, buy-back etc.
Consequently, on 21.04.2023, the petitioner received a communication from FPS stating that as a one-time measure, FPS had decided to grant the option holders a payment of USD 43.67 per option as compensation towards loss in the value of the options and it was based on the number of options held by the petitioner as on 23.12.2022. Furthermore, it was also stated that the FPS would be withholding tax on the said compensation.
The Senior Counsel, appearing on behalf of the petitioner submitted that the Revenue has misconstrued the one-time payment made on behalf of FPS as perquisite and characterized it as income chargeable to tax under Section 17(2)(vi) of the Act. He argued that ESOPs merely constitute a right, not an obligation to buy the underlying instrument and represent a right to subscribe to the shares of a company.
The counsel contended that on vesting, the option holder had acquired an unfettered right to exercise the option and got allotment of shares. He argued that ESOPs are taxable only in two contingencies- firstly, when the employee exercises his option and secondly, when the shares are sold by an employee. He iterated that in the present case, the stock options were merely held by the petitioner and the same had not been exercised till date.
The Senior Standing Counsel appearing on behalf of the Revenue, opposed the submission of the petitioners. He argued that the present writ petition has become infructuous as the transaction already took place on 31.07.2023 and that proceedings under Section 197 of the Act are not a fact-intensive exercise and rather, it is an administrative exercise and therefore, the AO was not obligated to dive into the matter to determine whether the stock option was exercised with the petitioner or not.
A Division Bench of Justices Purushaindra Kumar Kaurav and Yashwant Varma observed that “It is elementary to highlight that the payment in question was not linked to the employment or business of the petitioner, rather it was a one-time voluntary payment to all the option holders of FSOP, pursuant to the disinvestment of PhonePe business from FPS. In the present case, even though the right to exercise an option was available to the petitioner, the amount received by him did not arise out of any transfer of stock options by the employer. Rather, it was a one-time voluntary payment not arising out of any statutory or contractual obligation”.
“Thus, the reasoning appended to the impugned order, holding that the amount in question tantamount to perquisite under Section 17 (2)(vi) of the Act, cannot be countenanced in law, as the stock options were not exercised by the petitioner and the amount in question was one-time voluntary payment made by FPS to all option holders in lieu of disinvestment of PhonePe business” the Court noted quashing the income tax order.
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