Tax Hotline August 19, 2013

Welcome to Work in India: Recent Rulings on Taxation of Seconded Expats

The Delhi Income Tax Appellate Tribunal ("ITAT") and the Delhi High Court ("HC") recently passed judgments which are likely to have a positive impact in relation to expatriates seconded to India by multinational companies. We summarize below the decision of the Delhi ITAT in the case of Robert Arthur Keltz,1 and the Delhi HC in the case Yoshio Kubo2.

  1. In situations where expatriates are employed to work in India only for a certain fraction of the vesting period under a global employees stock option plan ("ESOP"), only such fraction of the ESOP perquisite is taxable in India at the time of exercise of the stock option, in case of a Resident but Not Ordinarily Resident ("RNOR")3;

  2. The contributions made by the employer in the home country towards social security of the employee in compliance with home country legal requirements are not taxable in India, so long as the vesting of the contribution is dependent on a contingency;

  3. Taxes of the expatriates, which are borne by the employer, are exempted from tax in India, and accordingly grossing up is not applicable in payment of tax on salary where post-tax salary is paid by the employer;

  4. In cases where for tax equalization purposes, the salary payable in India is computed by the employer by deducting the tax that would have been payable in the home country ("hypo tax") from the salary normally payable during exercise of employment in the home country (in lieu of discharging the income related taxes of the employee in the host and deputed country), the hypo tax cannot to subject to tax in India.

We provide below more information in relation to these decisions.


In the case of Robert Arthur Keltz, an employee ("Employee R") of United Technologies International Operation, a company based in the USA ("UTIO"), was granted ESOP for 34,000 shares in January 2004 with a vesting period of 3 (three) years from the date of grant. He was sent on secondment to UTIO's Indian liaison office in April 2006. He exercised the stock options in February 2007 while on his assignment in India.

Employee R filed his income tax return for the financial year 2007-2008 as an RNOR and offered to tax such fraction of the ESOP perquisite4 equal to the fraction of the vesting period for which he excised employment in India. However, the Income-tax Assessing Officer ("AO") ruled that Employee R's taxable income would include the total ESOP perquisite. In appeal, the Commissioner of Income Tax (Appeals) reversed the AO's order.

In further appeal, the ITAT noted that Employee R's operation from outside India during the remainder of the vesting period of the ESOP (which was prior to Employee R's deputation to India) did not involve the performance of any service connected with any India-specific job or activity. Hence, the ITAT held that only a proportionate stock option benefit, which is relatable to the service rendered in India is taxable in India. The Delhi ITAT followed its earlier decisions5 in doing so.


In the case of Yoshio Kubo, a Japanese national ("Employee Y") employed by Sony Corporation of Japan ("SCJ") was deputed to work in Sony India Ltd. SCJ made contributions in compliance with legal requirements in Japan, towards social security benefits of Employee Y.

The Delhi HC rejected the tax department's argument that the payments fell within the scope of perquisite. Section 17(2)(v) of the Income tax Act, 1961 ("ITA") deals with any sum payable by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity, barring payments made through recognized funds and certain statutory funds. The court held Employee Y does not get any vested right at the time of contribution of the fund by the SCJ. Being a contingent payment, the contribution does not qualify as a perquisite until the contingency occurs.


In the case of Yoshio Kubo, where a bunch of appeals were decided together, the employees in many of the appeals were recipients of post-tax income from their employers i.e., their tax liability was borne by their employers.

The issue in question was whether tax was payable on such tax liability borne by the employer, i.e., whether the total income on which tax is liable to be paid should be determined by grossing up the post-tax income received by the employee to include the tax payable.

The revenue relying on precedents laid down in various cases, including the Supreme Court's judgment in 1993 in the case of Emil Webber6, argued that the post-tax salary should be grossed up to determine the total income on which tax is payable. However, the Delhi HC upheld the employees' argument that tax is not payable on the tax liability borne by the employer by virtue of the exemption under Section 10(10CC) of the ITA, which was introduced in the ITA by the Finance Act, 2002.

Under Section 10(10CC), in case of perquisites of an employee which are not provided by way of monetary payment, if tax is paid on such perquisites by the employer on behalf of the employee, such tax paid by the employer is exempt from tax. In other words, grossing up is not required in case of perquisites which are not provided by way of monetary payment. The Delhi HC came to the above decision by concluding that taxes borne by an employer on behalf of the employee is a perquisite which is not provided by way of monetary payment.The relevance of arriving at such a conclusion is not clear as the exemption is relation to the tax on the tax paid on the perquisite as against the tax on the perquisite itself.


In both cases, the respective employers had adopted the policy of tax equalization, a method adopted by multi-national companies to ensure that employees who accept international assignments receive equal post-tax salary as compared to those not so deputed. Under the policy, all the taxes on the income of seconded employees are borne by the employer, subject to the condition that the employees would not be eligible to that part of the salary equal to their tax liability in the home country, which would have arisen if they had not been seconded to a different country ("hypo tax").

In both cases, the decision rejected the tax department's argument that no specific exemption has been provided for hypo tax under the ITA. Relying on the Delhi High Court judgment in Dr. Percy Batlivala7, it held that hypo tax is one that never accrued to the respective employees. Similar views have also been taken in earlier cases by the Bombay High Court7 and by the Delhi and Mumbai ITAT9. Such a view was also formally adopted by the government of Belgium by way of a Circular10 in 2011.


The decision on taxation of ESOP is on the basic principle that a RNOR is not subject to tax in India on any part of his / her income which accrues or arises to him/her outside India, unless the same is derived from a business controlled in India / profession set up in India. The decision also confirms the specific principle that salary income shall be deemed to accrue or arise in India only if paid for services rendered in India11. The decision is also in consonance with the 2010 OECD Model Tax Convention on Income and Capital, which recognizes the principle of apportionment.12 There are also many instances of this principle being adhered to in judgments around the world.13

However, as held in the case of Markand Gadre v. ACIT14 (following the decision of the Bombay High Court in CIT v. Avtar Singh Wadhwan15), if the profits accruing on exercising the stock options are "received" in India, the same could be taxable under the ITA.

It is also important to note that the methodology of attribution as recognized in this decision would be applicable only in situations where the income/perquisite received can be attributed and divided uniformly across time and thereby be offered to tax proportionately. This mechanism may not apply in situations where the attribution and division of the income/perquisite uniformly across time is difficult, such as in the case of an employee receiving performance-based bonus for particular tasks performed across different countries or in the case of senior officials who may not be performing functions with a uniform monetary value or who may be rendering services of a dual nature.

On the issue of taxation of hypo tax and social security contributions, the decisions have re-affirmed the well-established position that income that has neither: (i) accrued or been deemed accrued nor (ii) received or been deemed received, cannot be taxable in the hands of a taxpayer.

Thus, except as regards the issue on grossing up of post-tax salary, which is both against established principles and also shaky in terms of statutory interpretation, the decisions, by re-iterating established principles in the context of employment benefits, brings about certainty for employees deputed to India by providing a reasonable basis for determination of their taxable base salary and for taxation of benefits on exercise of stock options.

Ashish SodhaniMukul Aggarwal and T.P. Janani 
You can direct your queries or comments to the authors

1 Assistant Commissioner of Income Tax v. Robert Arthur Keltz, dated May 24, 2013 (Robert was represented by UTIO ILO).

2 Yoshio Kubo v. Commissioner of Income Tax, dated July 31, 2013

3 It is a tax status applicable only to individuals

4 Under section 17(2)(vi) of the ITA, in case of ESOPs, the difference between the market price on the date on which the option is exercised and the price payable on exercising the option is treated as a perquisite.

5 DCIT v. M/s Eric Morquxer and Ghorayeb Emile, 2008-TII-11-ITAT-DEL-INTL; ACIT v. Ellin 'D' Rozario, dated 5th December, 2008

6 Emil Webber v. Commissioner of Income Tax, V&M, Nagpur AIR 1993 SC 1466 (200 ITR 483), It was held that the tax liabilities actually borne by an employer on behalf of an employee would form part of the salary base of the employee by virtue of being accrued income of the employee (as it the employee's obligation for which it is applied).

7 CIT vs. Dr. Percy Batlivala (2010) 2010-TIOL- 175-HC-DEL-IT; Similar views have also been taken by the Bombay High Court in CIT vs. Mr. Jaidev H. Raja, (2012) 211 Taxmann 188 (Bombay) and by the Mumbai ITAT in DCIT v. Bikram Sen (ITA No.810/Mum/2012)

8 CIT vs. Mr. Jaidev H. Raja, (2012) 211 Taxmann 188 (Bombay)

9 ACIT vs. Mr. Short Donald, ITA No.412/Del/2005; R Scott Bayman v, JCIT, ITA No.675/Del/2002; ACIT v. SH Franciscus Martinus, ITA No.4576/Del/2004; DCIT v. Bikram Sen (ITA No.810/Mum/2012); Roy Marshall v. ACIT (2008-TIOL-567-ITAT-MUM); Mihir Jagdish Doshi v. DCIT, ITA No.6798/Mum/2007

10 Circular (Ci.RH.241/598.238), dated 12 September 2011

11 It includes rest periods or leave forming part of the service contract of employment, which is preceded and succeeded by services rendered in India.

12 The OECD Model Convention states that where a stock option is derived from employment exercised in more than one country, the portion of the stock option benefit derived from employment exercised in each country should be determined and the income which can be attributed to each country should be proportionated based on the number of days during which employment has been exercised in a country to the total number of days of employment from which stock option income is derived.

13 It has been held that the country in which the employee is seconded has the right to tax only such portion of the income from employee stock options which is related to the period the employee became a resident of that country (Finland - Case 4.8.2004/1773, 4 August 2004 and Switzerland - Case 104/2003, 10 October 2003) or was working in the other country (Germany - Case I R 119/98, 24 January 2001).

14 [2008] 21 SOT 454 (Hyd.)

15 [2001] 247 ITR 260

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