More than three years after the Supreme Court quashed a case against Infosys Technologies for failing to deduct tax at source in an employees stock option (Esop) scheme, the income tax department has not refunded the sum to the company.
The case made headlines as the tax department had said Infosys had evaded tax of R73.52 crore on stock options granted to employees during 1996-97, 1997-98 and 1998-99. But a bench of SH Kapadia and B Sudershan Reddy held the department had ?erred.? Specifically, they had noted that ?this is not the case of tax evasion.? The pending refunds are among the over 500 such cases which FE discovered relate to the Bangalore circle, the hub of the Indian IT sector.
In the Esop case, Infosys had coughed up the entire amount before the case reached the Supreme Court. It, however, contested the demand by filing an appeal with the the Income Tax Appellate Tribunal. After the authority cancelled the demand, the I-T department appealed to the Karnataka High Court and then finally the Supreme Court, which dismissed the case on January 4, 2008.
At the Bangalore centre, the I-T department has granted no refunds in 524 cases, sources said. Refunds have been granted in 317 cases and out of these, in only 102 cases have the refunds been granted with interest. No Infosys executive was available for an official comment but a reading of its annual reports suggests that between 1996 and 2000, about 1,629 employees received warrants ? a security that entitles an employee to buy stock at a fixed exercise price.
FE?s repeated phone calls to an income tax official in Bangalore over the last two weeks remained unanswered. A questionnaire emailed to the department’s PRO in Bangalore received no response either. Nonetheless, sources said the department?s refrain has been that it is facing manpower shortage, leading to refund delays. Company executives and chief mentor Narayana Murthy have made several representations to the government for expediting the refunds, sources said.
? It is surprising how a Supreme Court order can be ignored by a government department. The IT industry is scared to pursue these cases very aggressively for fear of being slapped with more arbitrary demands from the department,? a software industry veteran who did not want to be identified said. Earlier this year, the department had raised a tax demand of over R450 crore on Infosys for wrongfully claiming tax exemption on onshore services by declaring them as software exports. A similar demand was raised on iGate-Patni.
Infosys pioneered Esops in the country when it instituted the plan in 1994. Around 7,50,000 warrants were issued by the company to Infosys Technologies Ltd Employees Welfare Trust, to be held and transferred to selected employees from time to time. Each warrant entitled the holder to apply for and be allotted one equity share of the face value of R10 each for total consideration of R100. 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 scheme, every warrant had to be retained for a minimum of one year. At the end of that period, the employee was entitled to elect and obtain shares allotted to him on payment of the balance R99.
The option could be exercised at any time after 12 months but before expiry of the period of 5 years. For the assessment year 1999-2000, the I-T assessment officer 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. He held that the ?perquisite value? was the difference between the market value and the price paid by the employees for exercise of the option.
He, therefore, treated Rs 165 crore as perquisite value on which TDS was charged at 30%. Infosys was called a defaulter for not deducting TDS under Section 192. However, dismissing the demand, the Supreme Court noted that during the assessment years 1997-98, 1998-99 and 1999-2000 there was no provision in the Income Tax Act, 1961 which made the benefit by way of Esop scheme taxable.
It became specifically taxable only with effect from April 2000. The court also held that a warrant is a right without an obligation to buy. Therefore, ?perquisite? cannot be said to accrue at the time when warrants were granted.
The IT industry has had a hate-hate relationship for a long time with the income tax authorities. ?We are seen as just cash cows and hardly as a sector that adds strategic value,? said an IT industry veteran.