Direct Tax Quarterly Milestones (July-September 2026)

LG Electronics Inc.¹ (Assessee), a tax resident of Korea, was engaged in the manufacture and sale of electronic appliances and had entered into several transactions with its Indian subsidiary, LG Electronics India Private Limited (LGEIL). Following a survey at LGEIL, the tax officer concluded, based on statements from its employees, that the Assessee had a fixed place permanent establishment (PE) in India due to the activities of expatriate employees seconded to LGEIL.

The matter reached the Income Tax Appellate Tribunal (ITAT), Delhi. The Assessee argued that LGEIL had entered into employment agreements with each expatriate and that the individuals were in its full-time employment. The expatriate employees were subject to LGEIL’s service conduct rules, their salary was paid by LGEIL, and they worked exclusively for the benefit of LGEIL and were subject to LGEIL’s rules, regulations and policies in all respects.

The tax department argued that the employees were under the Assessee’s control. It also relied on statements from certain employees to argue that the Assessee determined their salaries.

The ITAT examined the statements of the expatriate employees and their employment agreements and held that LGEIL did not constitute a fixed place PE in India as the survey statements did not establish that the expatriates were under the Assessee’s direct control. The mere fact that an expatriate had previously worked with the Assessee, or that the managing director of LGEIL reported to a regional CEO in Singapore, was insufficient to conclude that the expatriates worked for the Assessee.

Based on the employment agreements and withholding tax certificates, the ITAT noted that the salaries paid by LGEIL were subject to withholding tax in India; LGEIL’s rules and regulations, including termination and disciplinary action, applied to the expatriates; and they were exclusively employed by LGEIL. The ITAT therefore held that the tax officer had ignored the employment agreements, which were integral to establishing the employer-employee relationship.

The ITAT observed that the tax officer had relied primarily on statements recorded during the survey, without providing documentary evidence to substantiate that the conditions to establish a fixed place PE were satisfied. It concluded that the tax department had failed to establish that the Assessee had a fixed place PE in India.

This ruling underscores that while robust contractual documentation covering direct employment, local payroll, and disciplinary control is essential, operational conduct must also mirror those agreements to mitigate PE exposure.

The Bangalore Bench of the ITAT, in Pramod Kumar Jain² (Assessee), held that vested but unexercised stock options were capital assets, and gains arising from their repurchase by Flipkart Private Limited, Singapore (FKS) were taxable as long-term capital gains on the facts of the case, rather than as a salary perquisite.

The Assessee, an employee of Flipkart Internet Private Limited, held options granted by FKS under the Flipkart Stock Option Scheme, 2012. FKS repurchased the vested options in assessment year 2020-21 without the Assessee exercising them or being allotted any shares. The tax officer treated the consideration as a perquisite taxable as salary income, relying on Form 16 and the repurchase offer letters. The Commissioner of Income-tax (Appeals) upheld this treatment and the Assessee appealed before the ITAT.

The ITAT held that Section 17(2)(vi) of the ITA taxes an ESOP perquisite when specified securities are allotted or transferred to an employee at no cost or a concessional price, with valuation based on the fair market value on the exercise date. Since the options were never exercised and no shares were allotted, the provision did not apply. Relying on B.C. Srinivasa Setty,³ the ITAT also held that the absence of a workable computation mechanism precluded the corresponding perquisite charge. Employer tax withholding and descriptions in Form 16 or the offer letters did not determine the legal character of the receipt.

The tax department relied on the Madras High Court’s decision in Nishithkumar Mukeshkumar Mehta,⁴ where compensation for a diminution in option value was treated as a salary perquisite. The ITAT distinguished that case because the taxpayer there retained the options, while the Assessee’s options in the present case were actually repurchased.

The ITAT further held that the vested stock options were capital assets representing rights to subscribe to the underlying shares and that their repurchase constituted a transfer of those assets. Accordingly, the gains arising from the consideration received for their repurchase were taxable as capital gains.

Recent jurisprudence, including this ruling, highlights that the taxation of equity incentive schemes depends on the facts and transaction mechanics, such as whether consideration is paid for vested options, unvested rights, or allotted shares, or whether it merely compensates for a fall in value while the underlying rights are retained. The plan terms, the rights held by the employee, and the legal nature of the payout should therefore be carefully examined and documented.