The Supreme Court has dismissed an income-tax case against Infosys Technologies regarding failure to deduct TDS on earnings of its staff from an employees stock option scheme offer (Esop).
A bench of Justices SH Kapadia and BS Reddy said, Estimation of TDS under Section 192 (Income-Tax Act) in the absence of clear provisions on valuation of perquisite in this case would not justify the department in treating the respondent (Infosys) as assessee in default.
To implement its ESop programme, the Bangalore-based IT company had created a trust, Technologies Employees Welfare Trust, and allotted 7,50,000 warrants at Re 1 each to the trust.
Each warrant entitled the holder to apply for and be allotted one equity share of the face value of Rs 10 each for a total consideration of Rs 100. The trust was to hold the warrant and transfer the same to employees under the terms and conditions of the Esop scheme.
During the assessment years 1997-98, 1998-99 and 1999-2000, warrants were offered to the eligible employees at Re 1 each by the trust. Under the Esop, every warrant had to be retained for a minimum period of one year. At the end of that period, employees were entitled to obtain shares allotted to them on payment of the balance Rs 99.
The option could be exercised at any time after 12 months but before expiry of 5 years. The allotted shares were subject to a lock in period during which their custody remained with the trust.
The assessing officer for the assessment year 1999-2000 held that the total amount paid by the employees consequent to the exercise of option was Rs 6.64 crore whereas the market value of those shares was Rs 171 crore.
Therefore, the department treated Rs 165 crore as perquisite value on which TDS was charged. It was held that the assessee company was defaulter for not deducting TDS under section 192 of the Income Tax Act. Similar orders were also passed for assessment years of 1997-98 and 1998-99.
On the plea of Infosys, the Income-Tax Appellate Tribunal ruled that the right granted to the employees for participating in the scheme was not a perquisite under Section 17(2) (iii) of the IT Act. It was confirmed by the Karnataka high court. Then, the income-tax department filed an appeal at the apex court.